Coronavirus Crisis, Massive Market Dislocation, U.S. Treasuries Go Negative, CRE Lenders React

The CV crisis continues to disrupt society and financial markets with unprecedented speed and force as huge parts of the economy have shut down in a 2-week period. Massive intervention by the Fed and the largest stimulus/aid package in our history hopefully are providing some “bottom” to the carnage. The general estimate is that the entire discretionary part of the economy is shut down (approximately 35%). Unemployment is skyrocketing. Tomorrow’s initial jobless claims will likely be between 2.5 and 6 million, and next week’s will be equally as bad (if not worse). For comparison, the largest monthly drop in employment during the financial crisis was approximately 900,000 workers (March 2009).

Stimulus Bill #3: $2 Trillion, that is 2,000 billion dollars. It includes aid to major corporations and small business with strong protections for workers as companies (large and small) are required to retain workers in order to get grants and loans. There will be direct checks to taxpayers and “unemployment insurance on steroids”. The Fed will now have another $4 Trillion in funds to buy treasuries, mortgage backed securities, and a new twist, agency CMBS (but not yet regular CMBS). Watch for the Fed to possibly guarantee corporate credit lines, buy corporate bonds, and regular CMBS.

Indexes: This morning the yields on the 1-month T and the 3-month T went negative. (1M = -0.03% and 3M = -0.01%). This means that someone purchasing that note will receive no interest and slightly less than the principal amount of the bond when it is redeemed at the end of the term. In other words, paying the U.S. Treasury to hold the money. This is unprecedented here although negative yields are common in Japan, Germany and other countries. The 10-year T is now 0.83%. The Treasury market is functioning more normally after an initial crash and fear factor last week that saw investors selling treasuries to hoard cash. LIBOR: 30-day LIBOR is the most common index for floating rate loans and usually tracks the Fed Funds rate closely. According to that logic, 30-day LIBOR should be 0-0.25% today, but instead it is 0.92% due to stresses in the overnight funding market. Note that its likely replacement, SOFR, is at 0.04% (matching the lower end of the Fed Funds rate). This period of dislocation will spur further debate on the wisdom of replacing LIBOR with SOFR.

Fannie/Freddie: Since agency lenders are backstopped by the government, they are still lending, locking rates, and funding. Spreads are higher, of course, with floors on the Treasury. Full leverage loan rates are 4-5% today, with lower leverage under 4.0%. Underwriting standards are being tightened and proceeds are lower as most new loans have interest reserves required (typically for 6 months – 1 year of interest payments).

Banks: The banks are much better capitalized today than they were in the Great Recession and we have seen many small and large banks originate new loan applications during these past weeks. Apartments, Office, and Industrial properties are getting quoted. Retail is much tougher but not impossible, if the borrower is willing to sign recourse. Generally, we are seeing rates up to about 4.50-5.00% for commercial properties, with leverage around 55-65% max. Recourse is prevalent. However, some banks are hitting the “pause button” with a moratorium on new originations for 30-60 days until there is more clarity on the overall economic and medical situations. Some of the top multifamily bank lenders in California are unfortunately out of the market now.

CMBS and CLO: These lenders are mostly on the sidelines as the secondary markets are frozen as selling of securitized loans has come to a standstill. Some major originators have large pools or single asset loans sitting on their books, unable to sell. Also, levered bridge lenders that draw on bank repo lines to lend at higher rates are basically frozen as bank lines are being called. CMBS lending depends on low volatility and an active secondary market, and neither of these conditions exist right now.

Life Companies: Lending based on straight coupons. 5.00% is a common floor we are seeing. Only high-quality real estate, apartments, industrial, and office. Low leverage 55-60% LTV.

Specialty Lenders, Private Funds: Many well-capitalized fund lenders are active at higher rates. Rates are anywhere from LIBOR + 6 – 10% or a straight coupon in that range. These lenders are considering renovation and even construction loans. Thus, they are picking up business from borrowers who had lenders pull applications during this crisis.

George Smith Partners is here to help you during these uncertain times. Please call your GSP advisor for help with:

• Sources of rescue capital
• Strategizing through options and providing solutions
• Outsourced Financial analysis
• Restructure and bankruptcy advisory expertise

If you have an inquiry regarding George Smith Partners’ commercial real estate financing, please contact your GSP representative or Todd August, Chief Operating Officer at (310) 867-2995 or taugust@gspartners.com