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- Ackman-Ziff Market Update
Ackman-Ziff Market Update
The Latest Market Intel Up & Down the Capital Stack
Themes
Market Color
As the Federal Reserve continues its rate hikes to curb inflation, the capital markets have responded with overwhelming caution until there is clarity on when the Fed will stop and where interest rates are likely to settle.
Well-capitalized investors can capitalize on market dislocation, while highly-leveraged borrowers may face challenges. Expect higher leverage options to remain less available — particularly for construction loans, renovation loans, and other highly transitional business plans. This is due to constraints in debt service coverage ratios that are trumping debt yield and loan-to-value limits.
The equity and credit markets will stabilize when there is clarity on the future actions of the Federal Reserve's interest rate policy.
Looking into 2023, investors should take a long-term view during this period of uncertainty. The current macro risks and market dislocations may create attractive buying opportunity over the next 12-18 months.
Construction
Lenders remaining in the market are taking much more conservative approach to underwriting, reducing leverage levels to 50-60% LTC. The dislocation in the debt markets has provided opportunities for mezzanine and preferred equity capital sources.
Given the observed slowdown in overall new multifamily starts next year, and the slowdown within the single-family sector resulting from mortgage rates in the 6%-7% range, we believe construction pricing will continue to retreat over the next year. These savings should hopefully offset the increased interest costs.
On the bright side for multifamily, the U.S. still has a shortfall of nearly 4 million multifamily and single-family units. The interim slowdown in development will exacerbate this problem. So, while we expect to see increased vacancies and concessions as we head into peak supply in mid-2023, we anticipate strong long-term demand.
Recently Closed Deals
$200 million acquisition facility to aggregate an SFR portfolio
$21 million (70% LTC) acquisition loan for a flex-industrial property
$27 million (80% LTC - senior + pref) construction loan for a BFR property
$48 million (60% LTV) refinance for a hotel
$72 million (82% LTC - senior + pref) construction loan for a multifamily property
$42 million (70% LTV) land loan
$23 million (63% LTC) acquisition for a grocery-anchored retail
Unique Pockets of Capital
Construction to HUD Construction Loans (up to 80% LTC) - The loans are non-recourse and are sized and structured according to GSE and HUD standards to facilitate the exit.
5-Yr Fixed Rate CMBS - With borrowers hesitant to lock in 10-year fixed rate loans due to the high level of interest rates, a few select banks have developed a 5-yr fixed rate CMBS program that prices similar to the traditional 10-yr product and serves as an alternative to floating rate loans.
Relevant Articles
Quotes
Interesting quotes from a 1989 memo on recession planning and lessons learned that an investor recently shared with me.
“Easy to overpay for projects if you only figure the upside – do not think the world can only go up.”
“Take more aggressive position with banks and other lenders sooner as opposed to later.”
“In looking for value in down market be sure and look to replacement cost compared to purchase price. Use conservative estimates based upon today’s rents, without increases.”
“Lenders have a “herd” mentality. When your market is “in”, it is powerful; when your market is “out”, the reverse is true.”
“Pride kept us from cutting projects, debt, rents, and overhead in a timely manner (psychologists have proven that the human psyche will take enormous risks before it will admit to a loss).”
“We let our borrowing ability get the better of us. We covered up our mistakes for at least two years because we could borrow more money. If we would have had to face up to the problem earlier, we probably would not have a) had the magnitude of loss we have experienced, or b) done more deals with our cash instead of using it to retire debt.”
Author: Jordan Brustein
Email: [email protected]
Mobile: (516) 996-7722
Wishing you and your loved ones a happy and healthy holiday season.