Mesa West on Staying the Course: Q&A
Mesa West Capital Vice President Brian Hirsh on the multifamily industry’s enduring appeal for the nonbank financing set.
Mesa West Capital faced a global financial crisis in 2008 and came out successfully on the other side. One of the original commercial real estate debt funds, the nonbank lender relies on strict lending parameters when navigating uncertainty, and working with experienced sponsors has always been a core principle of the company’s investment philosophy, Mesa West Capital Vice President Brian Hirsh told Multi-Housing News.
In the interview below, Hirsh provides his insights on the near- and medium-term futures for multifamily lending.
Is Mesa West Capital approaching the current economic fallout in the same way it approached the Great Financial Crisis?
Hirsh: One of the keys to getting through broad economic disruption starts with building a quality, defensive portfolio of loans. Similar to the years leading up to the Great Financial Crisis, we believe that our current portfolio is well suited to withstand the current disruptions facing global markets. Rigidly sticking to our lending parameters and objectives is a pillar of our philosophy.
What are some of the main trends you’ve noticed in the nonbank debt financing landscape since the onset of the pandemic?
Hirsh: Multifamily, industrial, and, to some extent, office, have seen the most liquidity for nonbank financing from the early days of the pandemic. Hospitality and retail have not shared in the same return of liquidity. Nonbank lenders are continuing to focus on assets that are viewed favorably by banks and other secondary financing markets.
How has deal volume shifted since the early days of the crisis versus more recent months?
Hirsh: During the second quarter, the capital markets were almost completely shut down due to the great uncertainty around the pandemic. As we approached midsummer, there was much more clarity on what the new pandemic world looked like and the implications on commercial real estate. For quality real estate in strong markets, the capital markets are functioning quite well today.
Can you please tell us a bit about the recent refinancing wave in the multifamily sector? What about changes in multifamily loan-to-value ratios?
Hirsh: Multifamily has been an attractive asset class for debt investing for a long time now. Multifamily values and cash flows have real downside protection that many other asset classes don’t provide. While multifamily values are subject to fluctuations in market rents and cap rates, the cash flows at the asset level are much less binary in nature, making it a very attractive product to lend on. In the nonbank space, LTV financing in the 60 percent-70 percent range is readily available for quality assets.
What are some of the most frequently used loan structures you’ve worked with amid the crisis?
Hirsh: For deals that are in lease-up or have some other short-term cash flow disruption, we generally structure an interest reserve to provide capital for future operating shortfalls and interest carry.
We recently provided acquisition financing for a newer vintage multifamily asset in Austin. The deal provided a great opportunity to lend on a quality asset to an institutional borrower at an attractive basis relative to recently traded comps. Job and population growth are continuing to drive real rent growth in Austin, unlike most gateway markets today. Austin continues to be a market of focus for us as fundamentals are continuing to strengthen, while institutional investment interest is growing.
In terms of sponsorship, what are the specific strengths that Mesa West Capital looks for?
Hirsh: For Mesa West, one of the most important factors for sponsorship is experience. Experienced sponsors with long track records of success can better navigate disruption in troubled markets and protect value. Additionally, it remains important that sponsors are well capitalized in order to carry assets during a time of uncertainty. Working with best-in-class sponsors has always been a central tenet in our investment philosophy.
How have leverage levels changed?
Hirsh: Before the pandemic, Mesa West focused on lending at leverage levels that were in excess of the banks but still inside of the higher leverage-type groups, and this has not changed. Generally, we target 60 percent-70 percent financing opportunities.
Looking ahead, what are some of the determining factors that will shape the multifamily lending market?
Hirsh: We think there will likely remain some disruption in some of the higher cost-of-living coastal markets over the near term, and that fast-growing markets like Austin, Denver and Nashville, Tenn. will continue to attract some of the most aggressive capital given the tailwinds of those markets. Multifamily across all markets will remain a favored asset class for the capital markets in the near term.