With frequent changes in the strength of the stock market and federal interest rates, the debt markets have been in similar flux. Blake Okland and Alex Basile break down what the acronym EDSF stands for, how clients are navigating these changing markets, and what might be on the horizon this year.
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Guest
Blake Okland
Blake Okland is President of Multifamily Capital Markets at Cushman & Wakefield and Chief Revenue Officer at Greystone. He is responsible for the growth of the firm’s multifamily capital markets business, as well as growing our relationship with Greystone, a leading multifamily agency lender known for delivering the most creative capital solutions.
What is Multifamily Minute?
Experts from Cushman & Wakefield dive deep into the dynamic world of multifamily commercial real estate. These quick episodes cover the gambit of multifamily ownership; from why investing in multifamily is a savvy move, to management tactics and tips, to exploring alternative and niche multifamily assets, to debt and funding multifamily investments. Whether you're a seasoned investor, a budding entrepreneur, or just curious about the multifamily market, there’s something that will spark bigger, better and bolder ideas in the Multifamily Minute.
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Alex Basile:The commercial real estate business, I think it's really a a very cool industry. You know, you can work hard, be yourself, get to to know people and build those relationships through hard work and through working on deals together. There's really a realization by the market that this is likely the new normal for the short medium term at least, and recalibrating capital and strategies around the rate environment that we're in today versus waiting for it it to get better next month, which I think is very healthy for the market.
Host:All that and more on this episode of Multifamily Minute by Cushman and Wakefield.
Blake Okland:Hello. My name is Blake Okland, and welcome to the Multifamily Minute hosted by Cushman and Wakefield where we dive into what's on the minds of investors, operators, and market observers in the multifamily commercial real estate sector. I'm your host today, Blake Oakland, president of Multifamily Capital Markets at Cushman and Wakefield and chief revenue officer at Greystone. Today, I am proud to be joined by Alex Basile, who is a fellow dual employee of both Greystone and Cushman as an executive director out of our DC Metro Region and one of our debt experts. Great to have you here, Alex.
Alex Basile:Hey, Blake. Great to be here. Likewise.
Blake Okland:Let's just jump right in and start off with an easy one for you. Can you explain what EDSF stands for and what it is?
Alex Basile:EDSF. So that is the group within, Cushman and Wakefield where me and my team said EDSF equity debt structured finance. Those are the areas within our practice, and I can give a quick example of each. So equity, we recently wrapped up an equity transaction where we were engaged by our client to raise equity for a multifamily development here in the DC area. It was 250 units, give or take, new apartment building, and the construction lender was willing to lend 60%, of the cost.
Alex Basile:And for the other 40%, the local sponsor was willing to invest 10% of that and hired us to raise the other 90%. So we went out to the market and raised equity. We had a number of groups that were interested in that transaction spanning, a pretty broad spectrum. We had domestic life insurance, we had foreign pension fund, and we had private equity capital all interested in that transaction. Ultimately, the local sponsor selected the domestic life insurance equity as their partner on the transaction.
Alex Basile:So that is the e, the d is debt, and I wanna talk a little bit about that in more detail since that's where I spend the bulk of my time. So I'll come back to that. Structured finance, that is more complicated capital structures that we help our clients with where there's typically a variety of lenders and equity providers in the mix where you're having not only senior debt, but, maybe there's some mezzanine debt, some preferred equity, maybe we're structuring a a ground lease. So more kind of unique and complicated structures is our structured finance. Really, debt is where I spend the bulk of my time.
Alex Basile:And another example that I wanna just talk a little bit about is a transaction that we did recently in the DC Metro Region where a apartment building was recently constructed. It was leased up. The construction loan was coming due. The plan had been to sell the asset upon stabilization, but given some of the market dynamics, it made more sense for the ownership to to refinance and wait for market conditions to improve for the sale. So they hired our team to go out to the market and find them the best loan.
Alex Basile:So we did, we put together some marketing materials and went out to around 70 lenders. There was great interest. It came down to five lenders at the end who were the most competitive and really wanted the business. And and our team through creating that competitive environment was able to to get really the best terms for the client. And we had one lender step up and offer really a compelling combination of rate leverage interest only.
Alex Basile:When they really differentiated themselves, that was Fannie Mae and certainly one of the most active providers of capital in the multifamily space. And I think the certainty of execution with Fannie Mae was another compelling factor for the partnerships to go in that direction. That's the d in EDSF, debt.
Blake Okland:There's a reason that there's an acronym for it. That's a lot that you do. And across those three distinct things, it's pretty great how you can harmonize all those activities and and just produce a great result for your client. Maybe going in a slightly different direction, can you tell our listeners how you got into this industry and then how you got to what you do today?
Alex Basile:Sure. This this is funny because we were talking about this in the the show prep, and I said my story is a boring story because I I studied real estate and finance in college. My first job after I graduated college was in real estate finance, and now I've been in the real estate finance business for the last twenty years. And I think just digging in a little bit more, really my interest started when I was a kid and my grandfather bought a strip mall in the Poconos during the savings and and loan crisis. And it was just the back taxes that he had to get the capital together to bring the taxes current tax lien sale, he was able to do that with a partner, and that's how he got into the commercial real estate business.
Alex Basile:And I remember as a kid going by the the strip mall every now and then when I was visiting grandma and grandpa. And I think that's really what planted the seed and got me interested in the commercial real estate business. And it's been a fantastic place to to build a career. I think it's really a very cool industry that allows the relationship aspect of the business to to really shine. And and one of the things that I love the most about that is you say it's a relationship business, and that can mean you have to just wine and dine clients and woo people and be the flashiest salesman out there.
Alex Basile:And that's really not what that means. It means, you know, you can work hard, be yourself, get to to know people, and build those relationships through hard work and through working on deals together. And that's really what the relationship business means, which I think is really cool that you can form those relationships just by working hard, doing a good job, doing the right thing.
Blake Okland:Yeah. That's well said. And they they turn into actual real relationships, which is really fulfilling and gratifying. So it turns out that what you thought was a boring story was really just the suffix to a prefix that was a very interesting story that just happened earlier in life. Segueing a little bit here and getting into sort of a gray area, but I'm curious to get your responses.
Blake Okland:Looking ahead, I know you're not an economist, but I'd love your view on the impact of these higher for longer rates that are predicted. In fact, we just came off a a a week at NMHC over in Vegas where the the phrase shifted to hire for longer for longer. What are your clients saying? What advice would you have back to them? How are you helping them getting deals done today?
Alex Basile:Yeah. I think that's a great phrase because it has been higher for longer for longer, and it's been a long time. The ten year treasury crossed 4% over two years ago. And I think just looking back at this market cycle since the Federal Reserve started hiking rates and Treasures responded by yields moving significantly higher, I think initially there was a period of time where investors, owners were just waiting for rates to come back down. Yeah.
Alex Basile:It was only gonna be another month or three or six or twelve when rates were were gonna come back down and and transactions were gonna start to to flow again as a result of those the lower rates that we were all used to. And I think at this point, there's really a realization by the market that this is likely the new normal for the short medium term, at least, and recalibrating capital and strategies around the rig environment that we're in today versus waiting for it to get better next month, which I think is very healthy for the market. And I do think we started to see it last year with transactions starting to move again at at a reset basis. And I think this year, we're gonna continue to see that. That being said, when rates are higher, it's harder to make the return metrics work for investors.
Alex Basile:So I think we're just out of NMHC, like you said, and and everybody is really kicking the tires on every deal. They wanna underwrite every deal and try to find ones that work. The flip side is that there has been a ton of capital raised and the pressure to deploy that capital is real. And that is both on the equity side, people wanting to buy deals, that's on the debt finance side with lenders wanting to put capital that they've raised to work. What we've seen is the spreads on the debt side have compressed and the spreads are the lowest that we've seen in years.
Alex Basile:And that is because that capital wants to get out. We haven't seen as much of that on the equity side with investors willing to accept lower returns. I think we've seen some of it, and I think the pressure is building. With rates staying where they are, return metrics are just gonna have to reach a new equilibrium and that may mean that investor return expectations come down a little bit so that the numbers work.
Blake Okland:Ux, thanks for those those insights, and I I definitely think that this is gonna be a year of creativity. I I agree the amount of pent up demand to place capital, against a backdrop of, some challenging return metrics, etcetera, is gonna require, you know, full spectrum of solutions like the ones that you can provide through the full stack, if you will, of equity debt and structured finance. And thinking through some of what you've discussed, are are you seeing any trends from the product standpoint, shorter term durations, longer term durations, etcetera, etcetera?
Alex Basile:Yeah. Actually, we we have seen one major shift in the market, and that is the demand for floating rate debt. That is not something that investors have been very interested in over the last two years. And that's primarily because the yield curve was inverted, which means that the, shorter term interest rates were higher than the longer term interest rates, which is not a normal state. So it was actually for the last couple of years, more expensive to borrow on a floating rate basis than to to borrow on a fixed rate basis.
Alex Basile:Now for the first time in a couple of years since the Fed started hiking rates, we've seen the yield curve normalize and is now shaped with a positive slope, meaning that after the Fed cut the short term interest rates by a hundred basis points, those are now lower than the longer term treasuries. What that means is floating rate is now attractive where borrowers can get a loan where the interest rate floats. The primary benefit of that is not only an attractive interest rate, which now floating rate can provide, but also prepayment flexibility. With floating rate loans, investors are not locking in that long term rate. So it's much easier for them to prepay that debt if they wanna sell the asset or refinance the asset.
Blake Okland:Makes sense. Alex, just wanna thank you again for sharing these insights, and thank you to the audience for listening. To hear more episodes of the Multifamily Minute, please subscribe to our podcast on Spotify, Apple Podcasts, or the podcast app of your choice. Alex, thanks so much.
Alex Basile:Thanks, Blake.
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