Commercial real estate lenders are getting pickier, leaving real estate money managers with the choice between buying core real estate that is overpriced or using less leverage when they buy transitional properties or those in higher-risk sectors.
That means investment managers are having trouble spending the record $230 billion of available capital commitments they have amassed from investors. High real estate prices, heightened awareness to risk and concerns about being at the tail end of a real estate cycle caused an 11.2% drop in first-quarter commercial real estate sales volume, said a May 11 report by real estate manager Jones Lang LaSalle Inc.
The hotel sector and construction across all other sectors were first hit by the lack of financing six months ago. More recently, the multifamily sector has been having more difficulty finding financing, said Monty Bennett, Dallas-based CEO of hospitality real estate investment trust Ashford Hospitality Trust.
Indeed, most non-core properties are having more difficulty finding mortgages, especially in the U.S., said Ralph F. Rosenberg, New York-based global head of KKR & Co. LP's real estate business.
“When it comes to financing traditional assets, the credit markets are more discriminating today vs. a year ago,” Mr. Rosenberg said. “This is the byproduct of lenders reducing leverage levels and increasing credit spreads in the aftermath of China devaluing (its currency) last fall.”
That's a reversal from last year, when real estate managers were flush with debt because lenders stood to make higher yields on their investments, according to data from real estate research firm Situs RERC.
In 2015, yields on new real estate mortgages for office, retail, industrial and hotel properties improved from 2006 and 2007, when real estate was at the same point in the last cycle. In October, the average debt yield — lenders' return on a loan — for office, retail, industrial and hotel properties was 10.7%, compared with 9.6% in 2007, data from real estate research firm Real Capital Analytics show.
China's devaluation of its currency has made it more difficult to get loans.
“In the last six months since China devalued its currency, which increased return expectations in risk assets, it has been more expensive to borrow in the commercial real estate markets,” Mr. Rosenberg said.
KKR has been a net seller, and Mr. Rosenberg said he expects KKR will continue to derisk its real estate portfolio in this market.