In the last three years, commercial property lending has continued to gain momentum and it is fundamentally strong, while still maintaining disciplined underwriting standards. The fundamentals of the real estate markets also are improving via the growth in the housing markets, construction, industrial production, and the further strengthening of the consumer psyche. The convergence of these factors leads us to an optimistic 2014 forecast for the real estate lending markets. Banks now trust the improved value of real estate again, which results in increased lending competition that should keep spreads tight and fuel strong performance up the risk curve to broader geographies and asset types this year. To learn more, visit: http://www.us.jll.com/capitalmarkets

1. Northern
California debt
and equity market

2. Northern California debt
and equity market
As the economic recovery hit full swing in
gateway markets in 2013, San Francisco
witnessed the ready availability of various
pools of debt and equity.
Life Insurance Companies remained the
best choice for historically low-rate, midleverage loans on well-leased, core assets
and have been the most conservative
recently – requiring 80 percent or higher
occupancy and minimum debt yields of at
least 8.5 percent. In assets with occupancy
in the low 80 percent range, some implement
funding holdbacks until certain lease up
hurdles are met.
Jones Lang LaSalle

3. Northern California
debt and equity market
Banks provided competitive, shorter term,
mid-leverage funding and differentiated
themselves by their ability to provide
future funding on projects requiring upfront
capital investment to unlock their potential
value. Bank debt was available on a nonrecourse basis in 2013 but was highly
sponsorship focused. Banks also provide
maximum prepay flexibility. Banks are very
sponsorship focused but can be flexible
on lending criteria. To help with capital
improvements, banks offer prorated future
funding and in cases of low occupancy –
burn off recourse clauses.
Jones Lang LaSalle

4. Northern California
debt and equity market
CMBS issuance increased from $48B in
2012 to more than $90B in 2013 – though
still well below 2007 peaks of $229B.
CMBS lenders were willing to provide
higher leverage, lent in secondary markets
and demonstrated the ability to work in
front of mezzanine debt. CMBS lenders,
like Life Insurance Companies, aim for 80
percent or higher occupancy but are more
willing to lend on Class B assets or Class A
assets in secondary markets. Additionally,
CMBS lenders usually include debt service
coverage covenants of 1.25x with cash flow
traps imposed if the collateral’s cash flow
falls below agreed upon levels. However,
CMBS debt may be interest only from two
years up to the term of the loan – depending
on leverage level.
Jones Lang LaSalle

5. Northern California
debt and equity market
CMBS debt-underwriting standards have
certainly tightened from the boom days of
the mid 2000’s. Leverage levels are lower,
debt service coverage requirements are
higher, and lenders are more selective than
in their heyday. However, CMBS loans still
offer up to 75 PERCENT leverage with the
ability to work in front of mezzanine debt
which proves to be attractive to an array of
borrowers.
Investors seeking higher leverage on
assets outside of the Central Business
District often find CMBS debt to be a viable
financing option. CMBS debt is available in
markets in which Life Companies have yet
to return after the recession and provides
terms longer than those offered by banks.
Jones Lang LaSalle

6. Northern California
debt and equity market
On the positive side, CMBS loans offer a
high (up to 75 percent) leverage option in
“B” markets. In certain cases lenders are
also willing to work in front of mezzanine
debt. Though debt service coverage
requirements have tightened since the mid
2000’s, they remain reasonable – usually in
the 1.25x range. CMBS debt may also be
interest only from two years up to the term
of the loan – depending on leverage level.
On the flip side, being a securitized financial
product, CMBS loans offer the least flexibility
in troubled scenarios. CMBS loan docs
include structure to protect the interest of
their bond holders. These covenants, when
triggered, can greatly inhibit the operational
autonomy of ownership. CMBS loans are
also inflexible to prepayment – requiring
yield maintenance prepayment to ensure
bond holder yield.
Jones Lang LaSalle

7. Northern California
debt and equity market
Institutional, joint venture equity was
also available for office and residential
development. San Francisco proved to
be an active, and lucrative, market for
residential JV equity placement in 2013.
Strong demand has propped up a staggering
shortage of new supply, a booming tech
sector, and increased foreign investor
interest.
In San Francisco, 2014 is poised to start
off where 2013 left off with lenders set to
increase allocations. Extremely low cap
rates have driven yield hungry investors out
of the city and into other Bay Area markets.
Financing has been, and will continue to
be, available throughout the region. There
are a substantial number of experienced
developers evaluating opportunities –
most will require joint venture equity and
construction financing.
Jones Lang LaSalle

8. Northern California
debt and equity market
In 2013, we executed almost equal
amounts of debt and equity deal flow.
We witnessed an active market for
acquisition financing across the major
asset classes and a spike in refinancing
interest from long term holders hoping to
take advantage of historically low interest
rates. Rates varied throughout 2013
due to fluctuations in treasury rates but
lenders stood firm to general location,
occupancy, debt yield, and debt service
coverage requirements. Attractively priced
construction debt was also available
for condo, residential, and industrial
development with experienced sponsorship.
Due to strong market fundamentals and
a drastic lack of new supply in the city,
residential development JV equity was also
available to the right sponsor.
Jones Lang LaSalle

9. Northern California
debt and equity market
In general, foreign investors are looking
for stabilized, “A” assets, in the core
submarkets of the city. Some see it as a
safe, long term, alternative to park money
which allows them to underwrite higher
acquisition prices. These buyers tend to
be conservative in nature and require
low leverage, long-term financing – if any
financing at all.
32
Jones Lang LaSalle

10. John Manning
Managing Director
Jones Lang LaSalle’s Capital Markets
John.Manning@am.jll.com
+1 415 395 4953
Download the complete report
Debt and equity availability update:
The guide to financial commercial real estate
Jones Lang LaSalle