I entitled this very specifically because things are changing so quickly. COVID-19 has sucker punched commercial real estate finance on all fronts. Retail, light industrial, and office tenants are mostly closed for business. Multifamily tenants are struggling to pay rent as they lose jobs. Hotels are closed…
As a backdrop, at this moment 30-day LIBOR is at 0.625%, while the 10-year treasury is at 0.597%. In the lending world today, these indexes are treated like Uncle Monty’s bad toupee. Seen, but never discussed.
This is because investor spreads are higher than typical, and nobody wants to say that they are lending at 390 over the treasury when they were at 200 before. So, many lenders are quoting coupons (all in interest rate) only.
Let’s walk though different lending sources:
BANKS
Bankers, meaning local and regional banks, are working from home, and the process of getting anything done is slow at best. However, we are seeing banks quote specific types of loans, and see this as an opportunity. For example, we have several quotes competing for clients that are not seeking to cash out large amounts on maturing loans. Multifamily and light industrial are the easiest candidates for these loans. Office and retail, more difficult, but if we can show that collections are good enough, we can get it done. Hotels… not happening today.
So what are we doing? For maturing loans where the client does not need much cash out, we are seeing no problems. If they do want a material amount cash out, we are getting loans with no prepayment penalties and with future advance language. When the market comes back, and it will, the lender can either advance more dollars or lose the loan. We are explaining this up front to clients and lenders, by making sure that there will be free assignments of mortgage if the lender elects not to advance more cash at a later date.
Also maturing loans and acquisitions are taking priority over refinances. Those seeking to simply lower their rate are having to wait in line at many banks, but not all.
AGENCIES
For multifamily, as of today, the agencies are as conservative as the banks. They are more focused on all-in leverage than cash out, though cash out does matter. If the borrower is 55-60% LTV or less (regardless of it being a cash out situation), they are aggressive. Good pricing, good execution, and lots of options. It gets more complicated as leverage increases. For high leverage loans (acquisitions primarily), there can be up to an 18-month Principal & Interest holdback. As the leverage decreases, the holdback decreases. FNMA and Freddie differ in the amounts, as well as the release provisions for the holdbacks.
LIFE COMPANIES
We have several active life company loans right now. Life companies are very conservative, and are not suited to lend for a typical property. Today, industrial, grocery anchored retail and multifamily are candidates with the highest probabilities of closing. Everything else… not so much. However, pricing has become inefficient. Life companies are a little lost right now. So much of their business has been large office buildings, retail portfolios, etc., that they have their staff working around the clock to work on existing loan forbearances. So, new business is difficult to price. We have one particular loan where we have been asked to move slowly through the process because pricing is likely to come down once they have their arms around the current crisis.
CMBS
When CMBS is performing well, we have a solid real estate market. Today, they are still alive contrary to some press articles. The top lenders are seeking business, but the property performance must be impeccable. Pricing is in the 4.25% to 4.5% range today for 10-year money; more expensive than many banks, but non-recourse is very important to many. Low leverage deals are calling the shots. If you need leverage, the cash flow needs to be verifiably stable. For the longest time, -ear loans were the only real option, as 5-year money was not very marketable in the secondary markets. Today, certain lenders are more willing to look at 5-year paper.
DEBT FUNDS / HEDGE FUNDS / MORTGAGE REIT’S
These groups are the most sensitive to market changes. Today, they are effectively out of the market, at least as we knew them prior. Several have lost their funding sources or ability to lever themselves. Others are looking to simply act as an intermediary between their large investors and our clients, on a deal by deal basis. Many are seeking distress in the market and hoping to purchase other lenders loans at a discount. We will see how this shakes out.
We work with two particular sources that are performing effectively as ‘business as usual’. The process is a little slower with remote work, but the ability to fund is still there, and the quotes are still good.
THE CURVE FLATTENING, IS THIS THE END OF THE CRISIS?
Certain media analysts are saying that the worst is behind us in terms of peak deaths per day and peek infections per day. The theory being that things are going to thaw out.
Will this be a V shaped rebound, or something less dramatic? We will see. However, the numbers seem to be finally moving in a positive direction.
We accept good news when we get it as we look forward to getting back into the office and resuming life where it left off. With that said, we are here to help you. We see this extraordinary time as an extraordinary opportunity to strengthen our relationships on all ends of the business and we look forward to meeting you face to face again.
