The Black Swan is upon us. As the global financial markets react to the unforeseen impacts of the Covid19 virus, we wanted to provide an update to our clients and industry friends regarding the current state of commercial real estate finance, loan origination, and capital markets.
The market is open for business. We continue to speak with lenders 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:
- The Fed Funds rate has been cut to essentially zero, but that does not mean that money is free. Rates remain very attractive historically speaking, but are not much different than they were just a few weeks ago, and in some cases they have gone up.
- Banks remain well capitalized and healthy, largely as a result of lessons learned in the last recession.
- Balance sheet lenders with their own discretionary capital are continuing to lend, however they are largely implementing rate floors or simply quoting an “all in” rate on new loan originations.
- Lenders that remain active are overwhelmed with new originations driven by the low rate environment.
- Some lenders are pausing new loan originations, while others have completely stopped quoting until they get a better indication of market direction.
- The CMBS market has been disrupted and is generally in a stall.
- Pricing CMBS loans is heavily dependent on how deals in the market are “pricing and trading”, and currently that volume is somewhere between very low and non-existent.
- 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.
- The Bridge Market is likely to face some 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.
- 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.
- Lenders in general have the luxury to cherry pick deals right now.
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 faces significant obstacles in the near term, as does retail.
- 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 weigh alternative options.
- Bridge capital that has been readily available to rescue recently completed self-storage lease up deals may become more scarce. This could accelerate distress on newly built projects that have been slow to lease up facing near term loan maturities.
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.
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 assistance with a transaction, our team is standing by to help. Learn More