Capital Markets See Pricing Volatility

LOS ANGELES—The capital markets are showing some pricing volatility, according to Elliot Eichner, a principal at Sonnenblick-Eichner. Eichner recently secured $236.7 million in first mortgage financing for Provenance Hotels to acquire a seven-property hotel portfolio. While he saw competition for the deal and plenty of liquidity, he also said that pricing in the capital markets has become volatile.

In the debt market for commercial real estate, there is volatility, and a lot of lenders don't know how to price because the pricing is moving. But there is still a lot of liquidity in the market. No one has said to us that they aren't lending, whether it is a fixed-rate mortgage or bridge loan," Eichner tells GlobeSt.com, adding that a lot of this is because of economic volatility. "This market is volatile. We have huge swings in the stock market; oil is down to $30 a barrel. There is a lot of uncertainty in the market, and that boils down to real estate and the capital markets."

However, this volatility hasn't stopped deals, like this major hotel deal, from getting done. "There is still a lot of liquidity in the market. We haven't had any lenders come and tell us that they are out of the market," adds Eichner. "Everyone is still lending, but the parameters are different. We are seeing lenders that give one spread, then adjust it and then adjust it again, and that is because their cost of capital is changing."

Provenance Hotels secured funding through a CMBS lender, which Eichner says is typical for hotel assets. "Life companies have a certain allocation, and they provide good financing, but most hotels don't fit the life company mold," he explains. "Most hotel financing is done through CMBS execution, and the rating agency is becoming a little more onerous when it comes to the hotel paper."

While Eichner doesn't have a crystal ball, he did say that there are some other events on the horizon that could add to the pricing volatility. "There are a lot of things happening in the CMBS market, like the Dodd Frank risk retention. A lot of people are saying that is going to add 20-30 basis points to the spread," he says. "No one knows because we haven't gotten there yet, but that is one of the things that is looming. Another thing that is looming is the wall of maturities coming in 2017. It will all get refinanced, but it is all coming at once."

For now, though, the pricing volatility is having minimal impact on the market. "The take away is that there is plenty of liquidity," says Eichner. "But the pricing is not going to be what it was six months ago."