The players have changed positions, in some ways quite significantly, but the game continues, according to Beyond the global health crisis, a special fourth quarter capital markets report from Marcus & Millichap.
While some categories of lenders have pulled out of commercial real estate, others have stepped up their lending. And as these adjustments take place, investing activity picks up steadily and low interest rates help motivate investors.
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As a tumultuous year draws to a close, the report notes, “The lending landscape has improved dramatically since the start of the pandemic, which has caused lenders and investors to take a break as they were assessing the impact of the coronavirus. ”
In addition, the proactive measures of the Fed have kept the debt capital “much more abundant than during the global financial crisis”. Both buyers and lenders have become more active since the second quarter, although sales activity is down substantially year over year.
Not surprisingly, many lenders have tightened underwriting criteria, narrowing options for some borrowers. “While liquidity remained abundant, loan / value ratios contracted as the health crisis unfolded, now standing between 50 and 70%”, according to Marcus & Millichap. At the same time, debt service coverage ratios have moved to 1.6x – 1.9x.
The challenges of change
Compared to the 2018 lender mix, the mid-2020 lender mix showed a sharp drop in CMBS, a steady increase in the role of regional and local banks (in most types of properties) and a sharp increase in mortgage activity. government agencies. The latter, according to Marcus & Millichap, “have been aggressive initiators in recent quarters to represent a much larger share of credit activity”. Yet multi-family mortgages now often require reserves for debt service, and much of the underwriting assumes no growth in rents for the next two years.
The types of products preferred by lenders are multi-family and industrial. The report indicates that loans from banks and non-agency lenders most often involve loans of five to seven years with rates between 2% and 3%.
When it comes to office buildings, most lenders are more selective, despite strong rental collections. Suburban office contracts are preferable, while buildings in large downtown markets may require a loan to the value of nearly 50%.
Life insurers have reportedly targeted low-leverage office contracts, as well as multi-family and single-tenant retail assets.
“The Federal Reserve’s commitment to keep the fed funds rate close to zero until at least 2023 is expected to keep interest rates near all-time lows for the next several quarters,” the report concludes, “offering convincing risk-adjusted returns to commercial real estate investors unlike other asset classes. “
