MARKET INSIGHTS
June 18, 2020

Andy Little

RICHMOND TIMES-DISPATCH

by Andrew Little, Special Correspondent

The Rolling Stones recently released “Living in a Ghost Town,” a chart-topping single that expresses what many have been going through the past two months, but the rock band’s 1981 hit “Start Me Up” speaks to what most commercial real estate participants are thinking.

Regardless of property type or political persuasion, investors are of one mind when it comes to getting the economy revved up again — and for some it is a matter of survival.

Retail and hotel property owners, in particular, are feeling the brunt of the shutdown’s pain. Like with the aftermath of a natural disaster, they are anxious to figure out the long-term impact on their investments.

The predicted apocalypse for multifamily properties has yet to materialize, with many property owners seeing little or no fall off in rental payments.

The National Multifamily Housing Council’s rental payment tracker showed 87.7% of rental households made a partial or full payment of rent as of May 13. This is a 2.1 percentage point decrease from the same time a year ago.

As for office property owners, there are great questions regarding future needs. Working from home has demonstrated that many companies can adapt quite well, but the offsetting argument is that more space will be necessary to have adequate social distancing in the future.

Industrial property owners are sensing that their product is going to be more in demand than ever because of increased use of online shopping means a greater need to stock inventory in distribution centers.

While owners grapple with different coronavirus-related fallout, the problem for brokers is that uncertainty has halted most investment sale and leasing activity.

There is an unbridgeable gap between buyer and seller pricing, so transactions are hard to come by. On the leasing front, activity is not dead, but plans by businesses to grow are stunted given the lack of clarity.

In the debt markets, lenders are sitting on plenty of dry powder (cash), but they are looking to deploy it for “straight down the middle” loans. This means that they are pushing leverage a little lower and need to see clean rent rolls with no tenants that could have been impacted by COVID-19.

The great news for borrowers with low leverage, clean deals is that rates have been bouncing around at all time lows.

Insurance company and pension funds are still active and pricing 5- and 10-year deals in the 3% to 3.5% range, according to the John B. Levy & Co. National Mortgage Survey. Some loans have priced below 3% for 10 years, but it is less common.

Multifamily borrowers also are taking advantage of the all-time low U.S. Treasury yields and finding pricing in the low 3% range for 10-year deals with full leverage.

The caveat for full leverage Fannie Mae and Freddie Mac loans is a debt service reserve is likely required depending on the debt service coverage, loan-to-value ratio and cash out for a refinance.

Even conduits are ready to start back up.

While most new offerings have been relegated to large, low leverage single borrower deals, the fact that new offerings have been subscribed means that the market is not dead.

In fact, pricing is available for certain deals with good tenants and history. The best estimate for sub 70% leverage is in the low 4% range for 10-year fixed rate deals.

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

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