The document provides an update on the commercial real estate lending landscape as of February 2014, highlighting a strong momentum in debt and equity availability across various U.S. markets, especially in cities like Boston and Florida. It notes increased competition among lenders, improved economic factors, and a diverse range of financing options available for different property types. Overall, the outlook for real estate lending in 2014 appears optimistic due to favorable market conditions and an influx of both domestic and international capital.

1. Debt and equity availability update
The guide to financing in commercial real estate
February 2014

2. Tom Fish
Managing Director
Capital Markets
Jones Lang LaSalle
Tom Melody
Managing Director
Capital Markets
Jones Lang LaSalle
Mike Melody
Managing Director
Capital Markets
Jones Lang LaSalle
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.
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Jones Lang LaSalle

3. Northeast debt and
equity market

4. Northeast debt
and equity market
Within the Boston market, increased
competition from all sectors of lenders
(commercial banks, CMBS, life companies,
debt funds and bridge lenders) is creating
an environment of modestly compressed
spreads and leverage thresholds for nonrecourse lending are beginning to tick
upward. We are now seeing non-recourse
construction financing on multifamily, office
and luxury condominium development in
isolated circumstances. Boston traditionally
does not see a high volume of Class A,
trophy assets trade and, therefore, lenders
are increasingly becoming more aggressive
on downtown Class B assets and stronger
suburban markets. In 2014, we expect
CMBS lenders to take a larger piece of the
lending pie across all property types. We
anticipate isolated instances of speculative
lending as well.

5. Northeast debt
and equity market
Lenders continue to rely on strong, proven
sponsorship and focus on seasoned
markets. In these instances, debt and equity
are plentiful. Tertiary markets are continuing
to be financed by local lenders. Debt capital
remains strong and all indications are that it
will remain so throughout 2014.

6. Northeast debt
and equity market
As commercial lenders remain more
conservative in terms of leverage levels,
debt yield and location, CMBS is filling
a needed void. The largest increase in
CMBS originations are occurring in the
stronger suburban markets. Leverage
levels are typically in the 70-75 percent
range. Increased competition is allowing
for some structural flexibility and increased
interest-only periods. More and more
CMBS lenders are holding some structurally
challenged assets on balance sheets for
future conversion to securitization. On
the positive side, CMBS allows for higher
leverage debt in B-markets, typically up to
75 percent LTV and a 9 percent debt yield.
However, on the flip side, more and firms are
servicing their own loans; but there remains
little flexibility as situations arise. The level
of documentation and level of review by
B-note buyers and rating agencies has
created a more arduous closing process.

7. Northeast debt
and equity market
Institutional capital (domestic and
international) continues to focus on
Boston based on its strong Education,
Medical, Life Sciences and Innovation
industries. More and more equity sources
are searching for well-located luxury
condominium opportunities given Boston’s
near two-month supply of housing
inventory. From 2012-2013, international
investors, in particular, have invested
$1.6 Billion in Boston, predominantly in
the office sector. Switzerland, Norway,
Canada and Germany have led
the way.

8. Jonathan Schneider
Senior Vice President
Jones Lang LaSalle’s Capital Markets
Jonathan.Schneider@am.jll.com
+1 617 531 4119
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Jones Lang LaSalle

9. Southeast debt and
equity market

10. Southeast debt
and equity market
The Southeast saw increased transaction
volume in most markets during 2013. For
instance, Florida saw a nearly 30 percent
increase in sales transaction volume over
2012, with total sales increasing from $68.7
billion to $89.1 billion. Loan origination
volumes followed a similar path and we see
transaction activity only increasing during
2014 as continued economic growth gives
both lenders and buyers increased comfort
with investing in the Southeast. More and
more life companies are seeking to put out
shorter term floating rate debt to limit their
exposure in what was, and still remains, a
very low interest rate environment. Similarly,
we expect both CMBS and Agency lenders
to increase volumes in Florida and certain
markets in the southeast.

11. Southeast debt
and equity market
In the multifamily sector in 2013, Agency
lenders reduced their target volumes in
many markets in the Southeast, which gave
an opening for Life companies, Banks, and
CMBS shops to gain market share. Rising
treasury rates also pushed many borrowers
to consider floating rate financing over fixed
rate. During 2014, we expect Agency lenders
to compete with a renewed vigor for assets
and to be the best option for maximumleverage borrowers. For borrowers with
value-add assets or lower-leverage needs,
Banks and Life companies will continue
to be an attractive source of financing,
with flexible prepayment penalties, future
funding options, and low rates. CMBS
shops will continue to increase originations
and will be competitive with agency lenders
for loans from 70-75 percent and will offer
decent periods of interest only – important
for buyers focused on initial yields.
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Jones Lang LaSalle

12. Southeast debt
and equity market
For borrowers with stabilized Class A office
and/or retail assets in core locations, Banks
and Life companies will be the best option
for acquisition financing and for refinancing
existing loans. For the best assets, we
have seen spreads below 200 basis points
on floating-rate loans from these lenders.
For borrowers with higher leverage needs
or secondary locations, CMBS shops will
be the best option.
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Jones Lang LaSalle

13. Southeast debt
and equity market
We see CMBS loan volume increasing in
2014. This will likely go hand in hand with the
continued increase in debt maturity volumes
between 2014 and 2017. There are number
of new players in the market and more groups
equals more origination. For the U.S., we
anticipate more than $100B in loans this year
on the CMBS front. Underwriting standards
have been and will remain tight. However,
CMBS lenders are more willing to increase
leverage and go to secondary/tertiary markets
than banks and life cos. The average amount
of leverage for these loans is 70-75 percent.
The target (or best) CMBS borrower is
seeking 70-75 percent leverage on a variety
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Jones Lang LaSalle
of assets (particularly office, retail, and hotel).
Sponsorship (or investor type) is less crucial
than the asset and market specifics.
During early 2013, debt yield was the main
limiter on loans. As interest rates have
increased, we see debt service coverage ratios
being the main limiter/determiner of leverage
amounts.

14. Southeast debt
and equity market
Last year proved to be an interesting one for
raising capital in the Southeast. With major
treasury rate swings during the middle of the
year, many acquisition groups found themselves
renegotiating or rethinking fixed-rate loans as
they were faced with lower loan proceeds and/
or higher interest rates. However, core deals in
core locations fared well during 2013 because
they were often backed by floating-rate loans
from either banks or life insurance companies
that were pegged to LIBOR, which experienced
limited movement during 2013.
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Jones Lang LaSalle
Looking to 2014, many of the lenders we
have spoken with have indicated they have
increased their allocations to Florida and other
key Southeastern markets. All things equal,
we see slightly higher interest rates for fixedrate financing during 2014, reducing leverage
levels slightly as underwriting standards (such
as DSCR’s) will not be relaxed. Attractive
rates and the prepayment flexibility provided
by floating-rate loans, both for core and
transition properties, will continue to
drive investors to partner with
these types
of lenders.

15. Southeast debt
and equity market
For multifamily borrower’s seeking max
leverage, Agency lenders will continue to be the
“go to” source of financing in most southeastern
markets.
L
ife Companies and Banks will offer attractive
terms for moderately leveraged (+/- 65 percent)
core assets or Class B assets in core locations
with a clear value-add story.
CMBS lenders will continue to be an outstanding
option for office, retail, multifamily, and hotel
owners/buyers with either Class B assets or
assets in Class B locations.
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Jones Lang LaSalle
During 2013, the majority of development in
Florida and the Southeast has been multifamily
residential, which has attracted the lion’s share
of Institutional joint-venture equity. During
2013, these investors were inundated with
development opportunities which increased
their selectiveness. We see this trend continuing
as opportunity (and a resurgent development
pipeline in many markets) causes these groups
to increase scrutiny and to demand better
terms.

16. Southeast debt
and equity market
International investors continue to pour capital
into South Florida. They are generally focused
on multifamily or major mixed-use projects, for
example the $1.0+ billion Brickell City Centre.
South American investors will continue to be a
major source of equity for both development
projects and stabilized Class A assets in core
locations as capital from these sometimes
turbulent economies seeks refuge in the relative
safety of the U.S.’s strong asset protection
and banking laws. However, as many of
these investors have been priced out of the
Southeast’s top markets, they have increasing
looked to secondary markets/value add assets
for investment opportunities.
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Jones Lang LaSalle
We see significantly more debt financing than
equity financing. JV equity providers continue
to evaluate projects based on location,
sponsorship, and returns – in that order. Equity
remains extremely selective, however certain
markets (such as the condo market in South
Florida) are attracting significant capital and
attention from equity investors.

17. Denny St. Romain
Managing Director
Jones Lang LaSalle’s Capital Markets
Denny.Stromain@am.jll.com
+1 305 728 7395
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Jones Lang LaSalle

18. Southern
California debt
and equity market

19. Southern California
debt and equity market
In 2013, the economic recovery solidified in
Southern California. Transaction volumes
increased, investors became more
aggressive and lenders more interested
in our markets. Life Company lenders had
good volume but the bigger news was that
banks are aggressively back in the market
and CMBS lenders more than doubled their
volume. Over the year, the increase in the
10-year treasury yield along with a steep
yield curve pushed borrowers to choose
floating-rate financing and/or shorter term
(5 year) fixed-rate execution. In 2014,
we expect continued improvement in the
supply/demand leasing fundamentals in
the major Southern California markets with
increased lender volumes across the board
(Life Companies, Banks, CMBS and Debt
Funds).

20. Southern California
debt and equity market
We saw a significant increase in CMBS
financings in Southern California in 2013.
Overall, CMBS volume nationally totaled
approximately $90 billion, which is double
2012 volume.
• MBS underwriting standards are much
C
more stringent than what we saw in 20052007 and lenders seem to be maintaining
their discipline. Average leverage is 65-70
percent given our low cap-rate markets
that put pressure on in-place debt yields.
• nvestors looking for higher leverage and/
I
or those buying non-trophy properties are
more likely to use CMBS financing.

21. Southern California
debt and equity market
CMBS loans provide higher loan proceeds
and liquidity for non-trophy properties with
solid occupancy and operating histories.
However, they don’t size well for nonstabilized properties and additional funding
is problematic. Non-responsive servicing
agents are a concern for many potential
CMBS borrowers.
There is currently a healthy amount of capital
for real estate investment at all levels of the
capital stack with, perhaps, more capital
than opportunities. As a result, lenders
and investors are becoming increasingly
competitive thereby putting pressure
on spreads and testing underwriting
assumptions.
As the economic recovery continues in
2014, expect a continued strong market for
real estate financing.

22. Southern California debt
and equity market
2014 Trends: multi-family development
losing some steam, hotels getting closer to
equilibrium, new construction of industrial,
office beginning to rebound, retail slow to
recover but could be the next opportunity.
Southern California, particularly Los
Angeles, always attracts international
investors given the size and diversity of our
markets and population. Hotels, apartments
and trophy office seem to generate the most
interest from the international investment
community.

23. Chris Casey
Managing Director
Jones Lang LaSalle’s Capital Markets
Chris.Casey@am.jll.com
+1 213 239 6332
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Jones Lang LaSalle

24. Northern
California debt
and equity market

25. 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.

26. 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.
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Jones Lang LaSalle

27. 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.
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Jones Lang LaSalle

28. 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.
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Jones Lang LaSalle

29. 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.
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Jones Lang LaSalle

30. 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.
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Jones Lang LaSalle

31. 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.
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Jones Lang LaSalle

32. 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.
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Jones Lang LaSalle

33. John Manning
Managing Director
Jones Lang LaSalle’s Capital Markets
John.Manning@am.jll.com
+1 415 395 4953
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Jones Lang LaSalle