Student Housing Business is the voice of the student housing industry.
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CAPITAL MARKETS NOVEMBER/DECEMBER 2015 STUDENT HOUSING BUSINESS .COM 36 2015 an Up-and-Down Year for the Capital Markets Will volatility continue in 2016? What impact will a rate hike have? Will the Fannie/Freddie "cap" once again be a major issue? By Lindsey Walker Marcec A After what's proven to be a turbulent year for stu- dent housing lending, the current capital markets environment can be summed up in one word: challenging. "We have seen a lot of volatility, especially for fxed-rate fnancing," says Ben Roelke, vice president of debt and structured fnance, student housing, with CBRE Capital Markets. "Both spreads and indexes have had large swings as of late. Over the summer, the capital markets saw CMBS spreads widen due to the thin market for those securities. And that has continued through the fall, according to Richard Marti- nez, vice president of multifamily production and sales for Freddie Mac. "We're still seeing challenging conditions in the CMBS market, which has impacted Freddie Mac and caused spreads to go up," he says. Tim Bradley, founder of TSB Capital Advi- sors, also sees the diffculties in the market. "End-of-year requests to close fnancing aren't getting a lot of traction with banks, agencies (Fannie Mae and Freddie Mac) or life com- panies," he says. "While there's still plenty of capital available for student housing con- struction and permanent loans, it's been more tumultuous in the current environment due to the amount of deals in need of capital with the amount of capital available at this time." For banks, part of this fnancing gridlock comes from the continued adoption of Basel III international banking standards. These reg- ulations dictate, in part, how banks character- ize construction loans. "They have to interpret the rules and then apply them to themselves," Martinez says. "Banks are focused on understanding what Basel III means." "With these challenges, plus more fnancing requests for banks due to current market vol- ume, it has become more diffcult to fnance large construction loans," Bradley adds. "But, despite all of this, banks are still lending money — it's simply that sponsorship and experience are more important to them now than ever before." Roelke agrees. "Overall the capital markets have remained attractive and still provide many options to weather this volatility," he says. Terms and Trends In general, experts are seeing higher loan- to-value ratios (LTVs) — averaging around 70 percent — with interest rates in the mid-4 percent range for 10-year fnancing for perma- nent debt. "We have also seen the GSA agency foating-rate spreads widen as high as 275 basis points over 30-day LIBOR recently due to the secondary market's volatility," Bradley says. "We've done deals in 2015 that have ranged from 60 percent LTV all the way up to 80 per- cent with fxed rates as low as 3.5 percent and foating rates as low as 2.25 percent," Roelke says. "And there has been a big push toward utilizing foating-rate fnancing through agen- cies and banks for value-add transactions." According to Lee Weaver, senior vice presi- dent/senior director of debt and equity for NorthMarq Capital, Freddie and Fannie are still the most active and aggressive lenders for student housing — even with the $30 billion multifamily loan cap that the Federal Housing Finance Agency (FHFA) imposed for 2015. "Think 80 percent LTVs, with the best rates between 4.35 and 4.5 percent, 30-year amor- tization, 1.25 DCR (debt coverage ratio) and interest-only periods," he says. "Fannie and Freddie are still inside CMBS on rate, plus the agency closing process is easier and more affordable than with a CMBS execution." "We're still at 1.3 DCR and 75 percent LTV, though that may change depending on the transaction," confrms Joseph Stepchuk, direc- tor of customer account management for Fan- nie Mae. "If you have a transaction in a mar- ket that's overbuilt, maybe we pull that back. " O l l t h i t l , BEN ROELKE, Vice President of Debt and Structured Finance, Student Housing, CBRE Capital Markets d l f d f TIM BRADLEY Founder, TSB Capital Advisors LEE WEAVER Senior Vice President/ Senior Director of Debt and Equity, NorthMarq Capital