COVID-19: State of the Capital Markets Second Edition

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To borrow a catchphrase from Harry Carey, the legendary broadcaster for our beloved Chicago Cubs…HOLY COW!   What a difference just a few weeks can make.

First and foremost, we hope that you and your families, both personal and work, are safe and healthy.  If we all follow the advice of the health professionals that are so bravely battling this on the front lines, hopefully we can get back to a more normal work-life balance in the not-too-distant future.

After more than a decade of historically low interest rates, stability and liquidity in the commercial real estate markets, things have changed quickly. We continue to speak with lenders and clients daily and have several transactions in progress.  If you are currently in the market transacting, it is important to be patient and understand that the market is fluid.  Our current view of the market can be generally summarized as follows:

General Market Conditions

  • The lending landscape has changed dramatically in just a few short weeks.  Generally speaking, this can be characterized as a shift from aggressive loan origination to conservation, asset management, and preservation of capital.
  • The funnel of available capital is much narrower than it has been in quite some time.  There are still lenders originating loans, but there are fewer of them and the criteria for qualified deals has intensified.
  • Lenders that remain active are overwhelmed with requests, and in general have the luxury to cherry pick deals right now.
  • Despite the fact that the Fed Funds Rate is virtually zero and the underlying indices are historically low, credit spreads have increased and rates are moving up.
  • Some lenders are pausing new loan originations, while others have completely stopped quoting until they get a better indication of market direction.
  • The uncertainty around when the pandemic will end and how much it will hinder our economy in the short and long term remains unclear.  Until that comes in to focus, the lending markets will continue to be impacted.
  • Transacting in the current market is difficult for obvious reasons.  It is difficult to get people on site to do the work needed to consummate a transaction.  If you are going to buy, sell, or finance real estate, it’s critical to set realistic expectations around timing and contingencies needed around all sides of the transaction.

Balance Sheet Lenders

  • Banks, Credit Unions and  Life Companies Banks generally remain well capitalized and healthy, largely as a result of lessons learned during the last recession.  That said, things are evolving quickly, and they are drinking from a fire hose dealing with requests for forbearances and loan modifications, struggling companies, processing SBA relief loans…you name it.
  • Balance sheet lenders that are still lending are largely implementing rate floors or simply quoting an “all in” rate on new loan originations.
  • Many of the Life Companies and Banks we have surveyed have implemented rate floors in the 3.75% range and up.  Anecdotally, one very consistent lender had a rate floor on new deals last week of 3.65%; this week that has shifted up to 4%.
  • Lenders are pulling back to a more conservative mind set and focused on straightforward deals with solid fundamentals and sponsorship.  This means lower LTV, higher DSCR and Debt Yield metrics, and solid market and sponsor profiles.
  • Many Life Companies and Banks have temporarily exited the new originations market to wait for more pricing clarity and in the meantime may be deploying capital into a higher relative value product or conserving it altogether.  This trend will continue if the pandemic is protracted longer than anticipated.


  • The CMBS market has been disrupted and is generally in a stall.
  • Most CMBS lenders have stopped quoting deals until the market comes back into focus.
  • Pricing CMBS loans is heavily dependent on how deals in the market are “pricing and trading”, and currently that volume is essentially non-existent.  It would be very difficult to accurately price a loan right now.
  • CMBS lenders that continue to quote deals are doing so with many caveats as the market remains very fluid.
  • CMBS spreads have widened significantly to offset the drop in the underlying indices.
  • If you are an existing CMBS borrower (or really any borrower) facing difficulty meeting your loan obligations due to the current circumstances, click here for some useful information from the Commercial Real Estate Finance Council regarding how to navigate with you loan servicer.

Bridge Lenders, Debt Funds, and Private Capital

  • The Bridge Market is facing significant disruption.  Debt funds that rely on repo lines or credit facilities from institutional partners are likely to pause originations while awaiting further guidance in light of general market conditions, the potential for margin calls, and other factors.
  • At the beginning of the year there were several hundred bridge lenders in the market utilizing a variety of strategies to fund deals.  Today there are a fraction of that amount still actively pursuing and funding deals.
  • The current environment will likely shake out peripheral lenders who do not have solid capital platforms and equity partners committed to a long-term vision.
  • Private capital sources with access to discretionary capital may see this as an opportunity to fill the short-term gap and increase their production until things stabilize. This will be risk adjusted capital with a pricing premium.

Other General Observations

Some property types will be affected more heavily than others.  Self-storage remains attractive as does multifamily, manufactured housing, and industrial.  Hospitality and retail face significant obstacles in the near term and potentially indefinitely.

Despite the likely short-term disruptions expected from the “no eviction” mandates, multifamily and manufactured housing properties will continue to benefit from the additional liquidity provided by Fannie Mae and Freddie Mac.

Equity will be affected by alternative investment opportunities that have resulted from a general market correction.  Deals that rely on “syndicated” type structures seem most vulnerable as individual investors consider alternative options.

Bridge capital that has been available to take-out construction loans on recently completed self storage properties may become scarce.  This could place pressure on maturing construction loans on projects that have been slow to lease up.


The programs and initiatives in the Coronavirus Aid, Relief, and Economic Security (CARES) Act that was just passed by Congress are intended to assist small business owners with whatever needs they have right now.

This program is extremely comprehensive and includes capital available to cover the cost of retaining employees through the Paycheck Protection Program (PPP), emergency economic injury grants, mortgage assistance via the small business debt relief program, and other resources.

For a comprehensive guide to help you better understand what is available to you and how to get started, click here.

If you need to transact, you should get into the market as soon as possible as the process is likely to be protracted given that lenders are overwhelmed by loan requests.  Borrowers need to be prepared for slower response times given general business interruption and distracted employees who are dealing with various iterations of the quarantine.

Our team at The BSC Group remains committed to supporting our clients and industry friends through all types of market conditions; after all, our company was founded in 2009 and we have deep experience navigating in choppy seas. Working with a mortgage broker can help ensure that your transaction is being prioritized by lenders that remain active, and that any perceived market risks are being mitigated upfront. If you need help with a transaction, or simply need counsel regarding the current state of the capital markets, we are standing by to assist.

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