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Page 26 — Office & Industrial Quarterly — June 2021 www.crej.com INDUSTRIAL — FINANCE I t’s starting to become old news to say it, but industrial properties continue to be the most desired product type among investors and lenders. As logistics, technol- ogy, e-commerce and construction ser- vices companies continue to be such important parts of our economy, the industrial real estate markets continue to flourish.We have worked on a wide range of industrial property financings this year, and we would like to share some frequently asked questions and key financing themes that have come up on recent deals. n Question: We recently completed a Class A industrial development and already are 75% leasedwithin six months of delivery. Is it too early to explore the permanent capital markets and consider refinancing our construction debt? No, it is not too early to explore a refinance. In fact, stabilized property lenders are getting more aggressive on pre-stabilized assets in order to increase their overall exposure to the asset class. Most of the balance sheet lenders – life insurance companies and banks included – are underweight in an industrial property exposure, and cre- ativity is a recurring theme to win good business. While demand certainly is high, there are sizing constraints and param- eters being used to consider funding pre-stabilized deals. Lenders have been requiring a minimum 1.0x debt ser- vice coverage ratio at closing and are solving to a minimum 7% debt yield upon stabilization.Typically, these pre- stabilized loans have minimal structure with holdbacks only for unfunded tenant improvement/leasing com- mission dollars on signed leases (no interest reserves or recourse required, so long as there is a 1.0x debt cover- age ratio in place). Furthermore, there is so much liquidity in the debt markets for industrial prod- uct right now that pre-stabilized loans do not come with pricing premiums. We are seeing fixed rates range from 125-150 basis points over the corresponding United States Treasurys, which puts all-in 10-year fixed rates around 2.75%-3.25%.We also are seeing floating rates between 150 and 175 basis points over Libor. Elevat- ed demand and strong liquidity in the industrial space continues to make it a borrower’s market with various financ- ing options available. n Question: What types of construction loans are available for speculative indus- trial development in today’s market? More and more lenders are actively seeking speculative industrial construc- tion loans for several reasons – specu- lative construction loans give lenders more exposure to the asset class, and speculative construction loans gener- ate marginal additional yield com- pared with existing, stabilized indus- trial loans. Depending on a borrower’s objectives, there are several options for speculative construction loans. For lower-leverage financing with minimal guarantees, life insurance companies are a great option and will fund up to 60% of cost. Cur- rent pricing is in the L+325-350 basis points range with a 25 basis points Libor floor. Local and regional banks, which have long been a dependable source for construc- tion lending, also can execute in the 60% loan-to-cost range with comple- tion guarantees only. Banks can push leverage up to 70% LTC with partial or full recourse, but with pricing that is very attractive in the L+250 range. Lastly, debt funds are continuing to make a push in the construction lending environment and have been winning deals by providing higher leverage options up to 75% LTC, with pricing around L+400.We have been seeing several spec industrial con- struction loan requests and there are various options available in the market- place. Borrowers can be confident that they will find attractive terms for spec projects with a great location in thriv- ing markets like Denver. n Question: How should I finance a vacant industrial building acquisition? Financing execution on vacant, value-add properties really depends on the borrower’s objectives – recourse, business plan, absorption timeline, etc. Several lenders are actively financing vacant industrial assets in well-located markets with an executable business plan sponsored by a seasoned bor- rower.The general financing terms for vacant properties are in the 60%-65% LTC range with pricing at, or better than, the construction terms outlined in the previous paragraph.These deals typically fall under the debt fund cat- egory, but certain banks and life insur- ance companies with strong value-add lending platforms will consider this profile as well, leading to a broader pool of capital, more competition and better economic terms. n Question: Are lenders interested in higher-finish “flex” industrial assets? Historically, lenders have shied away from high-office-finish indus- trial assets (40%+). In the current environment, lenders are actively pursuing this product type and are comfortable with higher exposure to higher office finish. Why are lenders interested in this product type now? It mostly stems from the fact that these assets typically have smaller tenant sizes, which leads to better rent roll diversification. A lot of these properties tend to be locat- ed in infill areas and benefit from a higher demand for last-mile func- tions, service-oriented businesses and proximity to densely populated areas. Lenders will want to drill into replacement rents, reusability of second-generation space upon lease expiration, location and surround- ing like-kind product, and historical performance before making a loan investment, but this asset class cer- tainly has gained attraction from the capital markets community. Pricing on both long-term fixed-rate and short-term floaters has been very competitive. Financing themes revealed by common questions Paul Donahue Assistant vice president of loan production, Essex Financial Group Cooper Williams President, Essex Financial Group Please see Donahue, Page 38