If you ask anyone right now, what is going on, their general response is, “we are still trying to figure it out.” This is a time where things are shaky and there is a sense of uneasiness floating in the air for commercial real estate investors, given the coronavirus crisis. My hope is to offer some clarity on what is going on in commercial real estate markets and provide some practical wisdom on how you should move forward. I will highlight every segment of the market, from a lending perspective.
CMBS (Commercial Mortgage Backed Securities) Markets
This is an area of lending for investment property loans from 2 to 100 million in size. The format here is book the loan and then bundle them up to sell off as a securitization. What makes this most challenging right now, is how tied they are to the stock market; which seems to be in disarray. Every group is more than likely going to widen spreads (raise rates) and probably lower the loan to value. Furthermore, you are going to see a consistent move away from the hospitality sector. Along with this you will see closings taking longer, as due diligence travel is going to slow down. Chances are the markets are going to force lenders to re-trade the original terms.
1. If you are in a purchase situation, begin now to negotiate with your sellers for more time..don’t wait.
2. Consider other lending options, i.e. Life Companies and Banks.
Life Insurance Company Markets
Life Companies are generally balance sheet lenders and focus on traditional office, retail, industrial, apartment loans. They typically stay true blue during good, and bad, markets. The reason for this is that they are always fairly conservative on their underwriting. Right now, the general consensus is “business as usual”. They are closing loans and don’t see that stopping at all. The only thing that will probably change for them is pricing, as the 10 year is on an emotional rollercoaster. Response times will probably be slow, because people will be working out of their home.
1. Use them as much as you can and lock your rate fast. Don’t play chicken on rates.
2. Keep your communication up with them and do everything you can to be diligent on closing timeframes.
Banks generally focus on relationship opportunities and are looking for long term clients. Their focus is to gain business deposits and work towards local community relationships. Right now everyone seems to be optimistic that this is “a blip on the screen” and should settle down in a few months. They are keeping their eyes peeled for clients in vulnerable industries to see how they can help. The only thing you might see change is how they price things right now. Other than that, they are ready to lend money.
1. Be proactive in your overall business (See our article here on how to do that).
2. Be communicative with your bank early if you are concerned about your business.
3. Work towards getting your loan package to be very clean and presentable.
Small Business lenders are focused on doing 7a and 504 loans. They work with small businesses that are trying to expand their business by buying, refinancing or building operational facilities. Right now, the only SBA government feedback is a “disaster relief fund” set up for people that fall victim to the Corona Virus. For more information on that program please visit SBA Disaster Assistance. Most of the lenders have expressed their continued interest to proceed with lending; business as usual. They are, however, probably shying away from the hospitality market, and restaurant arena.
1. If you are in a susceptible industry, be proactive and call your bank. Start looking into short term disaster relief monies.
2. If you are getting a loan, give yourself a few options as a back up. Furthermore, negotiate times with sellers as things are going to take longer right now.
Bridge Lending Markets
Bridge lenders focus on lending against income properties that are in a turn around situation. They lend to people who are going to renovate and lease up the properties, with the intent they will be taken out in 24 to 36 months. All of the bridge lenders, that are balance sheet, are fine. This means if they are not CLO (Collateralized Loan Obligation) lenders they are proceeding forward. The CLO lenders are probably going to play things a little closer to the vest, as the markets are a little shaky; they can’t sell bonds right now. Furthermore, you will see lenders putting a floor on their internal interest rates right now…money is getting too cheap.
Look for great opportunities in this area and capitalize on them. It is a great time to buy turn around deals.
Communicate with your lender to see if they are a CLO lender, or not. This could help you make some decisions of where to do your loan.
Agency Financing Markets (Fannie/Freddie)
Agency lenders loan predominately against multifamily properties that are needing permanent lending. This can include fixed rates for 5, 7 and 10 years on a 30 year amortization. Most of the agency lenders, which have been around for a while, are proceeding with their loans. Where things are probably going to change is in their interest rate pricing. The markets have been so volatile, and rates have gone down too much. Most groups have actually come back and re-traded their loans that are in process. If you were are 3.75%, then you might be bumped 15 to 20 basis points. The reason for this is that it is too low for them to make money.
1. Be prepared for your pricing to possibly change, but work with your agent to fight for things to stay. Leverage your relationship to maintain your pricing.
2. Be diligent about your closing time frames. Make sure you are not lagging on getting information in. Lenders will go to bat for borrowers who are cooperative.
Again, we know this can be an anxious time, but our sense is you don’t need to be. The best road ahead is to a) gain wisdom, b) plan and c) take action.
Dave Kotter is the principal of Integrity Capital LLC. A commercial mortgage brokerage in Scottsdale Arizona