By Chris Egger

As global financial markets react to the unforeseen impacts and mitigation requirements of the Covid-19 virus, stabilizing commercial real estate at historically low interest rates and being aware of strains on the system in advance of that opportunity is a paramount motivator for smart business.

Connect Media had the opportunity to get some important insights from George Smith Partners Principal Shahin Yazdi regarding the current state of commercial finance, originations, and relevant timing considerations in the chaos of a disrupted market.

Opportunity is a moment in time, and commercial real estate finance has a role to play in stabilizing assets for the long-term in an otherwise turbulent market. Here are Yazdi’s “in the now” answers to some relevant questions:

Q: How is the current disruption to global financial markets affecting commercial real estate finance originations?
A: The global financial markets have caused many originators to rethink their lending programs and adjust for the short term. Some lenders have paused any new loan originations for specific product types. For example, one lender has suspended all loans on retail until the Coronavirus situation is settled. Some lenders have completely stopped quoting new deals until they get a better indication of the market. Other lenders have adjusted their spreads given the additional perceived risk. In some sectors, originators are having to back out of deals to due to the uncertainty. However, others have continued with business as normal. We just sent a portfolio of six stabilized multifamily properties out to market and lenders are very interested.

Q: Are there different impacts across the spectrum of sources (bank, pension, bridge, private equity, etc.)?
A: For the most part, balance sheet lenders seem to be transacting as normal, but they are swamped with new originations and they are slow to respond. As anticipated with interest rates at all-time lows, the demand to refinance has exponentially increased. To handle the overflow of new business, debt sources have begun to increase their spreads. Some banks are instituting rate floors or just quoting an all-in rate. Even given all that, rates are still the lowest they have ever been, and it remains to be a great time to refinance. In particular, loans originated at the cyclical interest rate peak in late 2018/early 2019 can now be refinanced for a full percentage point lower (i.e. loans at 4.5% can be refinanced at 3.5% or lower).

Q: For loan structures in progress, do you expect to see any disruptions that could put finance packages in jeopardy? If so, what should a borrower be looking at for back up to plan A?
A: Mostly for hotel loans. Their revenue will plummet over the next few months and their YTD P&Ls will not be pretty. That may affect the mindset of some lenders. Those borrowers should be thinking of private lenders or debt funds that may be more willing to take that risk, especially on an acquisition. Unfortunately, some hospitality transactions may fall through or get delayed due to the current market conditions.

Q: Are the institutions reacting differently than the private lending sources?
A: Yes, institutions are being far more risk averse, while private lending sources are seeing this as an opportunity to put out capital until the market re-stabilizes. For stabilized multifamily properties with strong sponsors, there is still plenty of capital available. While Fannie and Freddie have been slightly more conservative with index floors, total coupons are still near historic lows.

We are consistently quoting rates in the low 3’s as of this week. There are heightened concerns among CMBS and balance sheet lenders towards hospitality and retail assets, we have seen more conservative underwriting and more scrutiny towards these sectors. Given the rapid decrease toward travel and consumer isolation/distancing, institutional lenders are forward thinking that there will be less demand for these product types.

Q: What should the different type of borrowers preparing for refinance, acquisition, redevelopment or development be considering in terms of new originations in the near term?
A: If you have a transaction, you should try to get out to market as soon as possible. No one can predict the market, and lenders are getting inundated with requests. Borrowers should be prepared to see slower responses from lenders as many offices are closed, people are working from home, and they have a lot of new business. Working with the right mortgage broker will help borrowers ensure that their transaction is being looking at and prioritized, and any perceived risk is being handled on the front end. When lenders receive detailed packages with well-underwritten transactions, they can issue term sheets in a timely manner.

For comments, questions or concerns, please contact Chris Egger