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COVID Crisis Nears It’s Peak in the U.S. With Hopeful Signs of “Curve Flattening”

Markets look to what comes next as the U.S. is seeing some benefits of the social distancing and shelter in place rules covering most of the nation, both credit and equity markets have rallied this week. “Back to normal” will not be achieved until a vaccine and treatments are widely available. The most optimistic estimates for a mass produced vaccine are for early-mid 2021. Most likely a “new-new normal” will be in place for the next year as the world starts to reopen. Widespread testing will be needed and will be accompanied by constant vigilance and fear of another wave of outbreaks. The gradualness of the comeback will most likely result in a more U shaped recovery rather than V shaped recovery. Retail will be altered as stores will encourage spacing, dedicated customer lanes that flow in one direction through the stores, sneeze guards everywhere, gloved and masked employees and customers. Offices will feature more spacing, testing of employees, and heightened sanitation measures, and more remote working. Demand for office space may change. Consumers willingness to fly, go to restaurants, stay in hotels, and attend conventions will be changed for the foreseeable future. A growing consensus of lenders and capital providers we are speaking with feel there will be some “marking to market” of valuations even after the economy has reopened. This may create issues for appraisers and lenders as they struggle to determine  “value” on the other side of this crisis.  This will create opportunity in the sales market along with challenges on how to underwrite future cash flow. Today we see many banks pausing on new loan submissions as they are inundated with submissions from small businesses for Paycheck Protection Program loans and other CARES act programs. The CMBS industry is intensely lobbying for private label CMBS to be eligible for Fed purchases. This is critical as the market is now basically frozen and CMBS is about 30% of commercial lending. The “max leverage CMBS loan” exit is the defacto underwriting threshold for almost all bridge and construction loans. Also, the Banks and Life Companies cannot handle the volume, nor do they offer as much leverage. To all of our readers, please stay safe out there and stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners