August 23, 2017

New York real estate might be more valuable than it’s ever been, but that doesn’t mean it is easy to sell. Despite a relative drop in sales, there is still liquidity in the market – just maybe not where you’d expect.

New York’s debt markets have responded to the recent relative drop in sales with increased activity, according to JLL and, to the surprise of some, debt funds have emerged as a steady player in New York’s debt markets and elsewhere.

“We are seeing some sellers aim for upper echelon prices, but sometimes the market just isn’t there for these trades as cap rates have essentially plateaued,” says JLL Managing Director of Capital Markets, Aaron Appel. “But owners can still pull equity from their building or recapitalize, and there are plenty of players – new and old – willing to explore deploying that debt capital.”

“There is a lot of liquidity in the debt markets because many owners are seeking loans for high quality and stabilized assets. But underwriting standards are tight, and getting tighter, and debt funds can afford to be a little more flexible with where they place their capital.”

According to JLL’s H1 2017 U.S. Investment Outlook, debt funds raised US$7.9 billion through the first half of the year — a 6.5 percent increase year-over-year – and four US$1 billion funds have already closed. That puts debt funds well on their way to beating 2014’s record US$15.9 billion in debt fundraising.

But there is still plenty of lending to go around, notes Sean Coghlan, JLL Director of Investor Research.

“Banks continue to comprise the majority of the lending pie,” he says. “While they are tightening their underwriting standards, we anticipate relative stability in their debt placement this year.”

Bank lending grew 13.6 percent in 2016, relative to 35.2 percent in 2015, according to JLL. The data also shows a 3.6 percent year-to-date increase in bank lending.

Fundraisers look for alternative landing spots
While a focus on debt funds is creating lending competition, pent up capital is still seeking a landing spot in many cases. The JLL report shows that global dry power now sits at US254 billion for closed-end funds, even as opportunistic funds are on pace for their least active year since 2010.

So where is that money building?

“Value-add funds are on pace to have a record year as well,” explains Coghlan. “Thematic funds like value-add debt are really driving the fundraising environment right now as the market starts to dictate tighter strategies.”

Five value-add funds of at least US$1 billion have closed this year, with three of them in the multifamily, industrial and retail sectors.
Value-add fundraising accounted for 43.2 percent of total fundraising at mid-year, or $13.8 billion. That amounts to 58.9 percent year-over-year growth and puts 2017 on pace to surpass 2007, when value-add funds set a record with nearly US$30 billion raised.

“The interesting thing we’re seeing here is that the debt capital is getting deployed, especially in markets like New York, whereas other funds are finding it more challenging to find a landing spot in this market,” said Appel.

While dry powder continues to build, debt funds have increased originations by 126.8 percent since 2012, according to the MBA Annual Origination Survey.

“There is no question debt funds will continue to appeal to borrowers as certain types of products get more challenging to finance. I expect to see this continue throughout this year,” Appel adds.




Aaron Appel

Managing Director, JLL Capital Markets

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