Melissa Farrell
Managing Director and Head of U.S. Debt Originations at PGIM Real Estate
Where in the capital stack are you most comfortable playing today, and where are you finding the best lending opportunities?
We are comfortable lending across the spectrum, especially when based upon current interest rates and debt-service coverage constraints. We are seeing good opportunities in all of our products, including core, core-plus, high-yield, and agency. We see great opportunities in the core-plus space for our debt fund. The market is less competitive, and the leverage levels have adjusted based upon the current cost of debt. Due to the reduction of leverage levels seen on core and core-plus, high-yield loans will be needed by many to “fill that gap,” so this is an area we are focused on, and we are seeing many opportunities for preferred equity and mezzanine loans.
What’s your best piece of advice for borrowers seeking financing during turbulent times?
We learned this from the GFC, and it is true today: Do not over-leverage your property, and communicate with your lender. Protect your position by using fixed-rate debt or putting hedges in place. So many borrowers have said that they just wished that they had bought an interest rate cap six months ago since it would have been much less expensive than it is today, even if it was just for insurance in case rates went up significantly – which they did.
Would you rather finance a well-established sponsor on a Class B office renovation in New York City, or the first-time developer of a multifamily project in the Sun Belt today? Discuss.
Location, location, location. It is times like these that brings us back to our fundamentals in underwriting loans and evaluating sponsors. There is no clear answer to the question – New York City is a very resilient market where we have already seen people move back and apartment rents are at an all-time high, so is the building well located? Can it be renovated? Can it be converted to multifamily? The Sun Belt has seen explosive growth especially in multifamily. The key here will be the location and the barriers to entry on new supply since that is the largest concern in most of the Sun Belt markets today.
If you had five minutes with Jerome Powell, what would you say to him?
I would tell him to be measured going forward since we are starting to see “cracks” in employment based on current news announcements, and that he should be careful not to overshoot since it does take nine to 12 months to see the impacts.
What keeps you up at night, and what helps you sleep?
What keeps me up at night are loans that have a maturity pending where the property has not seen an increase in NOI over the loan term to be able to absorb today’s interest rate or an interest rate cap that is expiring given current cap costs. The industry will not be able to “extend and pretend” — there will be no pretending since loans will have to be re-underwritten based upon current market conditions. Lower rates helped us to survive the GFC, but now rates are the headwind going forward. Overall, what helps me sleep is knowing our balance sheet is in good shape. We have been thoughtful on our underwriting approach, and we have great clients who are well capitalized and experienced.
