Commercial real estate borrowers who were hoping to capitalize on dramatic Fed rate cuts and a drop in the 10-year Treasury to refinance loans at record low rates may have missed their window of opportunity—at least for now.
Borrowers that were able to move quickly did access some incredibly cheap capital. In some cases, financing rates dipped below 3 percent as interest rates plummeted and spreads remained relatively stable. Yet lenders have since tightened their grip on capital given the market volatility and uncertain outlooks for the economy and commercial real estate properties amid the spread of COVID-19.
The low benchmark rates have been countered with higher spreads and rate floors from many lenders. Rates today are in line with those found in December 2018, generally in the high 3- to low 4-percent range, notes Brian Stoffers, global president, debt & structured finance at CBRE. “Many borrowers are taking a ‘wait and see’ approach and hoping for lower spreads once the market settles down,” he says. Meanwhile, those borrowers with maturing loans or 1031 exchanges that require timely closings are moving forward, he adds.
“There is still capital in the market, although the pricing of that capital has probably increased by at least 100 basis points from where it was three or four weeks ago,” says Gary Bechtel, president of Money360, a direct commercial real estate lender.
Banks, life insurance companies and the GSEs are still quoting deals on a selective basis, although spreads are higher and leverage is lower. The CMBS market is virtually closed due to spreads that have more than tripled. Those debt funds that depend on the CRE-CLO market or bank warehouse borrowing for their capital have moved to the sidelines.
Fannie Mae and Freddie Mac have continued to provide stable liquidity within the multifamily market. However, terms are dynamic and changing. Fannie Mae is now requiring that borrowers fund loans with an unpaid principal balance greater than $6 million with a 12-month debt service reserve. For loans with an unpaid principal balance of $6 million or less borrowers are required to fund loans with an 18-month debt service reserve. “What you are seeing today is a lack of liquidity with lenders that have moved out of the market or pressed pause as far as what they want to do and how they want to do it,” Bechtel says.
Capital is moving cautiously
Lenders are moving cautiously given the challenges that exist in underwriting properties and pricing risk. Speculation about the impact of COVID-19 on property income streams and occupancies is trickling through all sectors of real estate. For example, an apartment building could be fully occupied, but come April 1st, that owner may find that only 30 percent of tenants are able to pay their rent, notes Steve Rosenberg, CEO of Greystone, a commercial real estate lending, investment, and advisory company. “Lenders for sure are worried about the credit of the borrowers,” he says.
Capital that had been fairly aggressively chasing borrowers up until a few weeks ago hasn’t disappeared. “There is a lot of money sitting on the sidelines waiting to come back in, but it can’t come back in until it feels that the market has stabilized to a certain degree,” says Bechtel.
In some cases, capital is shifting away from lending to focus on buying debt portfolios from other lenders that need to raise cash for margin calls are exiting the market. Lenders are finding they can buy performing loans at a discount, which offers a more attractive yield, because they have a distressed seller, notes Bechtel. There are some signs that some of the discounts that first emerged on March 23rd are lessening. However, it is likely that those discounted loan pools will continue to emerge until there is stability in the market, he adds.
Borrows may need to be patient
Some areas of the mortgage market remain active. “We are incredibly busy refinancing all of the HUD loans that we have,” says Rosenberg. Even though spreads are a little wider, Greystone is assisting clients refinance loans where it makes sense, even in situations where there are prepayment penalties. HUD also is doing its best to work around shelter-in-place mandates or restricted site visits to senior housing facilities by using video from on-site staff to conduct virtual site visits.
Fannie and Freddie also are trying to maintain liquidity in the market with lots of opportunities to refinance, adds Rosenberg. “So, even though the agencies have been raising pricing a little bit and establishing floors on the interest rate, I see the agencies definitely leaning in and doing their best in the current market,” he says.
The commercial real estate mortgage market is highly volatile, but the refi market is active and requests from good borrowers and good properties are definitely getting reviewed and getting done at attractive rates and attractive loan structures, adds Jeff Erxleben, executive vice president and regional managing director for NorthMarq in Dallas. “It does take a little more patience at this moment to time things and work things through at an appropriate level, but there are still attractive terms out there for sure,” says Erxleben.
Erxleben advises borrowers to start going through the process so they are prepared to lock in low rates when those opportunities emerge. “If you’re not going through the process already, it may be too late to do that,” he says.