Term Sheet: Upcoming Fed meeting keeps US lenders on edge; Apollo-backed Athene tacks on studio exposure with $480m loan; use of ‘blend and extend’ financing emerges

Market analysts anticipate pause to slight bump on rate hikes at next week’s Federal Reserve meeting; Apollo subsidiary Athene originates $480 million studio redevelopment financing as insurers gain more lending ground in bank absence; more equity and preferred equity comes into play as ‘blend and extend’ financing methods pick up in usage; and more in today’s Term Sheet, exclusively for our valued subscribers.

They said it

“If rates go up another 50 basis points, that will cause more issues with banks, more issues with real estate” 

Jamie Dimon, chief executive and chairman at JPMorgan Chase, noting at a Barclays conference this week that a potential recession would add further stress and strain to an already volatile market.

What’s new

Pause in play: the US Federal Reserve is expected to opt for a pause or 25-basis-point rate bump next week, per market analysts (Image: Getty)

Pause expectations
The Federal Reserve is set to meet on September 20 and the cautious hope from market participants is that the US central bank will opt to keep the target rate at its current range of 5.25 to 5.5 percent. “The market is expecting rates to either stay stable or for there to be a 25-basis-point increase,” Ran Eliasaf, founder and managing partner of New York-based real estate credit platform Northwind Group, told Real Estate Capital USA. “It also feels like we’re closer to the end of rate increases. The real question is how long will rates stay at this level?” In Eliasaf’s view, rates will be higher for longer and the market will have to keep adjusting to that reality. “We have to remember that today’s rates are really the normal rates, not the extremely low ones we have seen.”

Hollywood forever
Apollo Global Management subsidiary Athene Annuity and Life Company this week originated a $480 million loan to fund the acquisition and redevelopment of Warner Bros Ranch in Burbank, California. Sponsors Worthe Real Estate Group and Strockbridge will use a portion of the financing to fund $175 million in acquisition costs. The remainder will be allocated for a significant redevelopment which will add 926,000 square feet of space, including 16 soundstages, a 320,000-square-foot office space and mill space. The financing is a sign of the times, with debt managers looking beyond traditional multifamily and industrial developments. Construction and redevelopment of studio space in particular has continued to attract fresh debt funding this year, including from national bank lenders such as JPMorgan Chase.

Super regional retail
A rare Canadian single-asset securitization is in the market, with Toronto-based Triple Five refinancing debt on the largest shopping center in Canada, West Edmonton Mall. The C$1.2 billion ($890; €830 million) financing is backed by the 4.4 million-square-foot super-regional mall in Edmonton and will be used to retire C$732.2 million of bonds and subordinate debt as well as fund reserves, according to a pre-sale report from New York-based rating agency Fitch Ratings. The mall, which includes additional hotel and entertainment space, has a Fitch-assessed debt yield of 12.6 percent and an LTV of 65.6 percent. The report noted that while the retail sector still faces headwinds, the property should benefit from its dominant status in the local market.


Brace to impact
New York City’s forthcoming launch of decarbonization-focused Local Law 97 at the start of 2024 could have near-term ramifications for about 50,000 buildings across the metropolitan area. Chicago-based advisory JLL noted in a report this week the initiative will place additional pressure on the city’s beleaguered office sector and force nearly 90 percent of such assets to make green upgrades in the next decade. Even trophy offices touted for their low excess emissions per square foot – such as SL Green’s One Vanderbilt and the Hudson Yards office towers – could face high fines because of Local Law 97, purely from their massive square footage. The law is expected to force a mass wave of retrofit activity, which will require either fresh equity or debt financing.

Next best use
Discussion of office conversions in the current market has typically implied redevelopment into a multifamily building or other use case, but global e-commerce giant Amazon took a more literal route with the unveiling of a new Manhattan base this week. The company redeveloped what was previously the Lord & Taylor flagship department store into a corporate office complete with the addition of bathrooms and kitchens as well as updated elevators and stairwells, per a Wall Street Journal report. Redevelopment of the Fifth Avenue asset required the company to contend with a lack of daylight spanning the floors, which clock in at 55,000 square feet on average. Reworking dated assets into their next best use – even if said use is office space at a time when the category is beleaguered – has been a challenge for lenders and operators across the commercial real estate market.

Market buzz

Blend and extend
The successor to the global financial crisis-era catchphrase “extend and pretend” has arrived, with market participants telling Real Estate Capital USA the new term du jour is ‘blend and extend.’ While the former referred to lenders providing a lifeline in the capital-constrained, post-GFC world, the latter is about a more hands-on approach being seen today, said John Vavas, a shareholder in the New York office of national law firm Polsinelli.

“It’s a way for the lender and the borrower to keep the loan current for another year or two,” Vavas told Real Estate Capital USA in an article published today. “The lender says, ‘I’m going to blend your rate up, you’re going to put a few extra dollars in as a reserve to cover me for interest shortfalls and we will extend the maturity for two years. The rate won’t be the rate we could get in today’s market, and we’ll charge you a modification fee and then put it all into a blender and extend the loan.’”

Data snapshot

Increasing distress
New York-based ratings agency KBRA published a report this week showing commercial mortgage-backed securities delinquent or specially serviced loan volume is on the rise. CMBS 2.0 distress levels reached 6.8 percent in August 2023 compared to 4.5 percent in June 2022.


Change in CalSTRS guard
The California State Teachers’ Retirement System last week announced the promotion of Julie Donegan to real estate director. Donegan will oversee the $316.5 billion pension fund’s real estate portfolio, which carried a net asset value of about $50 billion as of the first quarter this year according to the investor’s semi-annual real estate report. Donegan replaces and reports to Mike DiRe, who was promoted to senior investment director of private markets in January. Donegan is CalSTRS’ first new real estate investment director in more than 20 years and the first woman to work in the role. She joined the pension fund as a real estate portfolio manager in 2019 and most recently focused on residential assets while acting as interim director of real estate.

Loan in focus

SoCal super-regional: PGIM Real Estate this week originated a $455m refinancing package for an eight-building industrial portfolio in Southern California. (Image: Alere)

Regional refinancing
Newark, New Jersey-based manager PGIM Real Estate this week originated a $455 million fixed-rate financing package on behalf of its core lending strategy for an eight-building industrial portfolio. The funding will be used by Newport Beach, California-based investor and developer Alere Property Group to refinance a three-million-square-foot portfolio that spans Los Angeles County, Orange County and the Inland Empire of Southern California. PGIM has kept its lending and refinancing momentum in the multifamily and industrial sectors steady in recent quarters through its various lending platforms. Melissa Farrell, head of US debt originations at the firm, spoke with Real Estate Capital USA this week to break down PGIM’s approach to the current lending market.

Today’s Term Sheet was prepared by Randy Plavajka, with Anna-Marie Beal and Samantha Rowan contributing