CRE Lending “Will Always Find a Way”: Q&A with Polsinelli’s John Vavas
Interest rates appear to have stabilized, or industry insiders acknowledge that rates will remain “higher for longer.” Despite some remaining uncertainty, most real estate professionals agree that property fundamentals remain robust, even as market pressures linger. Experts agree that the monetary policy shift by the Federal Reserve to a more accommodative stance will inject additional optimism into the market.
We talked to John Vavas, an attorney and real estate finance partner at law firm Polsinelli, a law firm that advises clients on health care, real estate, finance, technology, private equity, and corporate transactions, about the current state of lending in the commercial real estate sector.
Vavas also touched on his concerns about borrowers’ refinancing needs, whether it’s time to exhale when it comes to lending and borrowing, and more.
CM: Tell us about your views on the current CRE lending environment.
JV: In the current CRE lending landscape, we’ve seen an increase in volume and deal flow. Certain asset classes that may have been dormant for a while have started to pick up. Whether it is because people need to refinance because of maturity dates looming or investors are recognizing certain value propositions, transaction volume has increased.
CM: How concerned are you about the refinancing needs of CRE borrowers?
JV: My focus, as lender’s counsel, remains my client’s ability to effectively deploy capital, which is, in turn, affected by CRE borrowers’ ability to refinance and transact. For me, the concern lies in the various increased carry costs that we have seen recently, namely insurance, property taxes and interest rates. When you couple those with either increased vacancy rates or rents not increasing at the same proportional rate, it’s natural to be concerned. I have seen that concern somewhat allayed by an influx of equity into transactions to account for these things.
CM: Given the current environment, what has been the most complex transaction you’ve worked on, and how did you get it done?
JV: One deal that comes to mind is the recapitalization of 125 Greenwich in lower Manhattan. My client, The Northwind Group, was the mortgage lender in that transaction. They made a $313 million loan to Fortress Investment Group. Fortress was converting their debt position into equity in to recommence construction and complete a luxury condo building. That deal closed in February 2023, which, if you recall, was a time in the market where there was a real dearth in mortgage financing. We were able to get it done with a lot of creative structuring and an institutional sponsor that was able to come to the table with sufficient additional equity to get the deal closed.
CM: What leading indicators do you monitor for the health of the CRE space?
JV: I think every type of capital has pluses and minuses. I have the most visibility in the debt fund space. I see these debt funds as an attractive lending source for borrowers who seek nimble partners who are not as risk averse as some other sources of debt. I see from my debt fund clients the ability to creatively structure deals to account for a number of variables and then move quickly to transact and close. Given the life cycles of the funds, they have capital to deploy, and I think that surety of execution in this market makes them attractive lenders.
CM: Explain the tradeoff of higher rates increasing interest income versus the downward pressure on loan volumes and credit quality. What’s your approach to identifying and structuring deals? Does that approach change once a loan is closed?
JV: The higher rates have led to more folks being able to deploy unlevered capital. Some could argue it is more beneficial to borrowers because they know who they are always dealing with. There is no financing source behind the scenes having a say in what gets approved by the mortgage lender.
When I was starting my career, I was told that to understand the risks of a deal and properly structure you needed to follow the money. I think that still applies. If you follow the money and see where it can fall out of the system or where it could stop then you can adequately structure for when and if it does. I focus on spotting where the risk of the transaction is and then figuring out how we can mitigate it.
CM: Is it time or too soon to exhale regarding CRE lending and borrowing?
JV: CRE lending will always find a way, and deals will find a way to be done. Whether that’s a result of opportunistic purchasers coming in and buying assets they think were overvalued at one point and now have level set or whether that’s an investor’s belief that there is value to be had because they have a unique or alternative strategy for the asset.
