The lending environment for commercial real estate has started to bounce back in recent months, but there is still hesitation to close deals across most property sectors. There are some attractive opportunities for lenders in today’s climate, such as multifamily and grocery-anchored retail.
That was the sentiment expressed during the virtual InterFace Carolinas panel, titled “Capital Markets Update: When and What will Unfreeze the Lending and Financing Environment?” France Media Inc.’s InterFace Conference Group and Southeast Real Estate Business hosted the event Thursday, Oct. 1.
Before the coronavirus pandemic caused a nationwide shutdown, the lending environment was the most competitive it had been in recent memory, according to Aaron Derby, managing director at Benefit Street Partners.
“The world went from a competitive market to a shutdown overnight,” said Derby. “Capital markets are very temperamental.”
Joining Derby on the panel was Hugh Allen, senior vice president and commercial real estate regional director for TD Bank; Steve Clikas, vice president of investments at Protective Life Insurance Co.; Preslava Kovatchevska, director multifamily production and sales at Freddie Mac; and panel moderator Matthew Rocco, president and national production manager for Grandbridge.
CMBS market rebounding
Derby says that while his firm continued lending in April and May on the balance-sheet side, it wasn’t lending on the commercial mortgage-backed securities (CMBS) side for two months.
“There was frankly no real bid for bonds outside of Freddie Mac and Fannie Mae bonds,” said Derby.
According to research from Trepp LLC, private-label CMBS issuance this year has fallen from 2019 levels. In 2019, there was a total issuance of $120.2 billion. Year-to-date through September that number is $52.2 billion.
Derby said, though, that the landscape is returning to its pre-pandemic self, noting that a triple-A CMBS loan is priced similarly now than it was in February, “which is an incredible statement to make.”
Kovatchevska said that the properties in Freddie Mac’s lending portfolio that are in forbearance are mostly small multifamily communities of approximately 50 units. She said that the properties are usually occupied by hourly employees and possibly categorized as workforce housing, meaning government assistance has been helping residents pay rent, and in turn allowing landlords to pay their mortgage payments.
Kovatchevska said that for Freddie Mac clients that required forbearance, they must provide a letter of hardship as well as proof of hardship, such as accounts receivable. Clients under forbearance were given 90 days and then 12 months to pay off rents under forbearance. She said that as of the end of September, when the program expired, 80 percent of the loans that were in forbearance in the Freddie Mac program had been paid off.
Derby also explained that new information on the coronavirus emerging seemingly every day has contributed largely to the lending market rebounding.
“We just know more now than we did in April, which was a very scary time,” said Derby. “There has also been significant stimulus put into the system.”
One such way capital is entering the market is from the government’s Coronavirus Aid, Relief, and Economic Security (CARES) Act and Paycheck Protection Program (PPP), which was born out of the CARES Act that assisted small businesses to help ensure their payroll. President Donald Trump signed the CARES Act into law March 27.
In response to the COVID-19 pandemic, The Federal Reserve lowered the fed funds rate to between 0 and 0.25 percent. The organization has since said it will raise the rates until the end of 2023 in an attempt to encourage borrowing.
Clikas said that he and his company took four days in late March to come up with a plan for lending amid a pandemic.
“There is a lot of relative value in the types of loans we are making, whether it be Amazon [fulfillment centers], Publix-anchored shopping centers and Kroger-anchored shopping centers,” said Clikas. “We can look at the Sun Belt and still have a focus on grocery-anchored retail, which has been our bread and butter for more than 50 years. It’s something we know and are comfortable with.”
Allen went on to say that COVID-19 is the “great accelerator.” He said the pandemic has sped up trends that were already underway, whether it be e-commerce in the retail sector, families moving to the Sun Belt from the Northeast or people relocating from urban homes to suburban homes. He said the lending environment will return to normal when consumers allow it to do so.
“Consumer confidence is going to give us the tailwind that our economy needs,” said Allen. “A [COVID-19] vaccine will not bring back jobs by itself.”
Those interested in accessing the InterFace Carolinas conference can do so by registering here. The portal will remain open for four weeks from the conclusion of the conference.
— Alex Tostado