MARKET INSIGHTS
April 2, 2020

Andy Little

RICHMOND TIMES-DISPATCH

by Andrew Little, Special Correspondent

U.S. Sen. Tim Kaine, D-Va., was interviewed recently about the coronavirus and aptly quoted a Tom Petty song from 1981 in his response: “The waiting is the hardest part.”

There is some truth to those lyrics.

In the early days of the coronavirus, the market enabled some developers to take advantage of lower rates. But that has changed in the past few weeks, wiping any benefits away.

Now, for many trying to access the capital markets, there is a dramatic pause. And if there isn’t a pause, high rates have effectively created a wait-and-see approach for many.

For instance, lenders of commercial mortgage-backed securities have completely stopped quoting deals. Three weeks ago, a full leverage CMBS loan might price at 3.5% to 3.75%, but there is no bid now.

On the life insurance company and pension fund side, new loans were pricing last month at the lowest rates ever recorded — ranging in the high 2%’s to low 3%’s. Now most institutional lenders are not quoting rates or are pricing loans with a floor in the high 3%’s to low 4%’s range.

Fannie Mae and Freddie Mac, the two multifamily lending giants backed by the U.S. government, are the most stable in this environment and open for business with pricing that is higher than a few weeks ago. But that is still reasonable given other options.

In Virginia, one of the largest construction lenders for multifamily transactions is the Virginia Housing and Development Authority. The VHDA offered a 30-year fixed rate construction permanent rate in the low to mid 3% range in late February. That same pricing now is closer to 5%, putting deals on pause.

The good news is that most lenders and market observers believe this is temporary.

While it will be extremely painful and the timing is uncertain, the rebound on the other side should be much quicker and stronger than the last few economic downturns.

In the meantime, borrowers and lenders are waiting and negotiating to get to the other side of this craziness.

Hotel owners and landlords with retail tenants have been impacted the most severely. Apartment and office owners also are expected to be hurt.

The Federal Housing Finance Agency recently came out with guidance for how Fannie Mae and Freddie Mac will treat multifamily owners who have tenants that can’t pay rent.

The borrower generally can defer up to three months of payments that would be recast over the ensuing 12 months. The borrower needs to ask for the deferral, show that the tenants have been impacted by the coronavirus and has to offer those tenants deferred rent payments without late charges or eviction.

Financial institution regulators also have provided guidance for banks, credit unions and savings and loan lenders for how to deal with loans that are impacted by the fallout from the coronavirus. Regulators generally have agreed not to classify restructured loans as troubled for a period of time while the coronavirus is impacting borrowers.

John B. Levy & Co. partner and investment banker Andrew Little can be reached at alittle@jblevyco.com.

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