Los Angeles-based real estate manager PCCP sees a short-term niche in providing financing for borrowers who are facing near-term maturities on debt held by regional banks.
“There are a lot of loans coming due that need to be refinanced and, with regional banks pulling back, we are seeing refi requests from borrowers who are working with banks that need to be repaid,” said Bill Lindsay, founder and managing partner at PCCP.
A case in point is a $57 million loan the firm originated earlier this month for the cash neutral refinance of Metro University City, a 309-unit, midrise apartment community in Charlotte. Meridian Capital Group, a New York-based advisory, placed the loan.
The sponsor, which acquired the Class A, newly built property during its initial lease-up in September 2021, has achieved a 97 percent occupancy level and is an experienced owner and operator of multifamily properties, Lindsay said. The loan, in part, will help to drive net operating income growth at the asset level.
PCCP was familiar with the sponsor prior to originating the loan. “The borrower had a regional bank loan coming due that needed to be repaid,” Lindsay said. “In some situations, there has been so much value created that you can easily refinance without additional capital and that was the case with this loan.”
The firm continues to seek opportunities like this. “While it is generally a very volatile environment for all asset classes, we have been trying to work with good borrowers on good real estate, which I always think is the most resilient formula for making it through uncertain times,” Lindsay added.
Lower transaction volume
Transaction volume has been down across the board this year, which in turn has meant there are fewer acquisition or transitional lending opportunities.
“Some asset classes are harder to underwrite than others and I think that explains, in part, why transaction activity is down. As a lender in mostly value-added situations, we need transaction flow to make loans,” Lindsay said. “I think this year, we will do more refinancing than normal because of that.”
With a roughly $1.3 trillion wall of maturities expected over the next two to three years, per data from New York-based MSCI, PCCP sees room to work with institutional sponsors with debt that needs to be extended, refinanced, or recapitalized. “Generally speaking, it is a good time to be a lender. It is just harder to be a borrower due to the cost of capital,” Lindsay said. “I think there is also less liquidity in the system, but it is there, on the sidelines, waiting for some stability.”
While the firm is seeing some activity in the major sectors, further interest rate increases and the potential for a recession has meant sponsors are expecting to see an impact on demand for real estate. “It is a hard market to underwrite investment in, but there are borrowers finding interesting deals to do and capitalizing them robustly and there are loans for us to make.”
Lindsay notes there has been substantial discussion of the problems facing the office sector but adds that there could also be challenges in multifamily as bridge loans originated in 2021 come due.
“Many of those loans were made with two- or three-year interest rate caps and now those have expired and are very expensive to replace,” Lindsay said. “Also, cap rates have generally expanded by 75 to 100 basis points in many markets, and you have the twin impact of having to buy another interest rate cap at time when values are down. This means that often, a sponsor needs to put in cash to get an extension or refinance.”
But in certain situations, this is not always the case. “I think with properties where there has been high rent growth, that rent growth has often offset any reduction in value from interest rate expansion. And then the borrower is in a great position to do a cash neutral deal, get the property stabilized, and hopefully a little bit more rent growth over the next two or three years and put a long term, permanent loan on it at that time,” Lindsay said.