Finance Experts Outline CRE Lending Opportunities Ahead Despite COVID-19

By Dennis Kaiser

Connect Commercial Real Estate’s Los Angeles Finance webinar, held earlier this week with a group of CRE finance leaders, delivered insights into how deals are getting done in Los Angeles, the Western States, and nationally. These experts explained what financing deals look like and the considerations that are rising to the top as we emerge from COVID-19 lockdowns and reopen the economy.

The discussion was moderated by George Smith Partners’ Gary Tenzer, and included Thorofare Capital’s Felix Gutnikov, Revere Capital’s Clark Briner and Alliant Credit Union’s Peter Margolin.

Tenzer kicked off the conversation noting that the U.S. economy officially entered into recession in February, which means the economy was already slowing down before the COVID-19 hit. He also pointed out that the 10-year Treasury “bottomed out” on March 9, setting off financial problems for borrowers. Those in the market at that time were able to lock-in deals at sub 2% rates, which Tenzer called a “once in lifetime opportunity to get that because the next day spreads blew out.”

Treasury rates remained low, but risk spreads widened out “considerably,” Tenzer noted, as secondary markets closed down for securities, subordinate notes, CMBS bonds, secondary debt funds for CBO’s, warehouse lines, banks, etc. Market liquidity evaporated. Lenders stopped lending or if they did execute deals, pricing increased, he says.

Subsequently, the Fed worked to stabilize the market by buying Treasury securities, CMBS securities, legacy securities and agency paper to try to create liquidity in market and narrow spreads through early spring. He pointed out that strategy helped lenders get more comfortable that the Fed was there to support them. Ultimately, he says lenders returned and commercial lending resumed, albeit at a more conservative basis before downturn in early March.

Alliant Credit Union’s Margolin noted their lending approach has changed since the COVID-19 pandemic hit. They handled permanent loans across all CRE classes in the pre-Covid days but post-Covid, retail and hotels are off the table because there’s too many “loan modifications to continue putting them on the balance sheet,” he says. Alliant’s focus now is on multifamily, manufactured housing, self-storage and industrial assets where they are comfortable lending on.

The impact of the coronavirus threat and stay-home orders have created havoc with the economy, but Revere Capital’s Briner noted that despite large unemployment numbers it hasn’t yet negatively impacted the multifamily sector. April experienced a 13% decline in consumer spending, yet there was a 10% increase in consumer income. That has translated into unprecedented levels of payments at multifamily portfolios on Revere Capital’s consumer and real estate books, he says.

Panelists pointed out the real key will be what happens once the stimulus money disappears. That could usher in a rise in unemployment and companies are not yet back up to full operations. Workers may be laid off at that point, which would make for an interesting final quarter or quarter and a half of 2020.

Thorofare’s Gutnikov shared that CRE performance today depends on the market. Hotel assets in markets such as Orlando and Phoenix are showing resilience. People are returning to offices in Dallas, but New York, which is facing greater impacts from COVID-19, is experiencing an all-time high for office vacancy and is expected to take longer to “bounce back,” he says.

Conversely, the industrial sector, and particularly the part that is linked to ecommerce, is outperforming other property types, more so than before COVID-19 hit, notes Gutnikov. And for the multifamily sector, he says they are receiving more payoff requests for value-add assets. They envisioned holding those assets on their books a bit longer, but given the agencies aggressive sub 3% terms, properties that were anticipated to finalize renovations and season a bit are looking to secure agency financing and “roll off their books quicker.”

You can watch the entire Los Angeles Finance update on the link below.

For comments, questions or concerns, please contact Dennis Kaiser