Green Shoots Appearing As Secondary Credit Markets Thaw

Some good news on lending as the first CMBS securitization since pre-crisis (early March) executed better than expected on Friday. The pool consisted of above average quality loans originated pre-crisis, with no hotels and very little retail. There was oversubscribed demand and spreads were tighter than expected throughout the bond classes. CMBS originators are cautiously optimistic as new loans are being quoted. Look for leverage in the 65% range, some reserves may be required at loan closing and extra scrutiny on sponsorship. Underwriting standards will be more conservative. As CMBS originates, we have seen some life companies narrow their spreads to win business on good quality real estate.

Some more “green shoots” are visible as the bridge lenders are starting originations also. The warehouse lending market (big banks lending to debt funds) has started up again, with more cautious leverage. The warehouse lenders will also monitor loan collateral more closely. Multifamily, office, industrial bridge lending is back with leverage in the 65-70% range with spreads in the L+350-450 range (as opposed to 80+% stretch bridge loans at L + 275-325 pre-COVID). As credit becomes more available, the focus will be on property specifics (location, resilience of the income, etc). Fundamentals going forward in this environment will be critical, and many of the fundamentals are dependent on the virus spread and hopes for treatments/vaccine.

Fed and Data: Fed Chair Powell’s remarks today shook markets. He called on Congress and the Administration to authorize further “fiscal support” or risk “long term damage” to the economy. He contextualized the recent unemployment reports with a stark statistic from the Fed’s recent survey, “40% of U.S. households making less than $40,000 per year lost a job in March”. Powell also (again) pushed back on suggestions that the U.S. implement negative interest rates.

Other Data: Yesterday’s CPI report contained unprecedented numbers: negative 0.8% CPI from March to April, the lowest since December 2008. However, food prices saw there biggest one month jump since April 1974 at 2.6%. The overall CPI was down due to big drops in clothing, energy and other categories. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

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