Capital Markets React to Rapidly Evolving Coronavirus (COVID-19) Situation
Notes from the CRE Capital Markets World: The economic impacts of the unprecedented measures being implemented to slow the spread of the Coronavirus are reverberating throughout commercial real estate (all product types and lenders). The reassuring news from the Capital Markets is, “this is not a credit crisis”. Unlike 2008, most lenders have liquidity. Much of this is due to the unprecedented and timely actions from both our government and the Federal Reserve in a coordinated response. The hotel and retail industries have been enormously impacted. Multifamily, office and industrial are not exempt as businesses and individual’s income and ability to pay rent is deteriorating.
Indexes: 30-day LIBOR is 0.75%, Prime Rate is 3.00%, the 10-year T is 1.25%. Risk spreads are widening, and many lenders are quoting an absolute coupon.
CMBS: Some lenders are quoting, some are not. Hotels are facing extraordinary headwinds and retail, while difficult, is being quoted. Spreads on new issue AAAs have widened from Swaps + 85 (early February) to Swaps + 200 (that’s basically an educated guess from originators as nothing has priced definitively until next week). New loans are pricing in the 4.00-4.25% for a 10-year loan with tighter underwriting. Fannie/Freddie: Quoting and closing loans albeit at higher spreads, 10-year fixed rate anywhere from 3.60-4.00%
Portfolio Lenders: Banks, Debt Funds, Specialty Lenders: GSP has spoken to several capital providers using this as an opportunity to gain market share and step in where other lenders have bowed out. “Rescue Capital” is the buzzword of the week as these lenders are looking “to the recovery” for good real estate. Equity: We are seeing some investors pivot entirely from the stock market looking for the “hard asset” advantage of commercial real estate.
Construction Lenders: For the moment hotel construction is being more heavily scrutinized but is still being considered if delivery is a year plus out. Likewise, for retail and office. Ground up multi-family and industrial are asset classes lenders are leaning into, with lenders dropping both their coupons and floors and coupling that with banks quoting up to 70% advance rates on project capitalization.
All this is being done in the “new world” of virtual meetings and calls. At this point all financial institutions we are in contact with are conducting business remotely, virtual meetings via Zoom and other providers are the norm and business is being conducted successfully. Inspections of apartment properties are shifting as tenants are reluctant to allow appraisers and engineers to enter units, lenders are rapidly issuing new guidelines allowing for exterior inspections and relying on sponsors to verify that unit interiors are acceptable.
Government – Fiscal Policy and Legislation: “Shelter in place” guidelines, mandatory closures of all non-essential businesses and moratoriums on evictions are sweeping the country as state and local governments implement these measures. Federal Government Stimulus (Fiscal Policy): After passing 2 major bills to provide funding for healthcare needs and some relief to workers, a massive $1 trillion + stimulus bill is being quickly crafted by the Senate today: Bailouts for vulnerable industries (airlines, hotels, cruise ships, etc.) and direct payments to taxpayers (aka “Helicopter Money”).
The Fed: The Fed has deployed their full power of the tools utilized during the financial crisis within a period of two weeks and so far has been successful in keeping credit markets functioning: (1) A rare Sunday announcement lowering their overnight lending rate to zero; (2) Creating $2.0 trillion of repo lines which keeps liquidity in the system and allows the $15 trillion of outstanding treasuries to trade efficiently (this is the critical base for all fixed rate lending and fixed income bonds); (3) Guaranteeing dollar swap lines with other central banks; (4) Massive Quantitative Easing: Monday the Fed purchased $700 billion in Treasuries and Mortgage Backed Securities (Fannie, Freddie); What’s next: Unprecedented actions including the Fed directly purchasing corporate bonds and municipal bonds, and commercial paper, thereby using its unlimited balance sheet to directly support ailing industries.