MARKET INSIGHTS
August 3, 2020

Andy Little

RICHMOND TIMES-DISPATCH

by Andrew Little, Special Correspondent

Bob Dylan probably wasn’t referring to the government as a savior in his 1975 classic “Shelter from the Storm,” but many commercial real estate owners should be thankful for protection the federal government programs have offered them from the impact of COVID-19.

According to data from the National Multifamily Housing Council, 91.3% of renters were current with their apartment rent payments through July 22. That compares to 93.4% who had paid their rent through the same date last year.

Collections are down slightly, but given the huge drop in employment caused by the pandemic, the results are extremely positive.

But will that continue without the federal stimulus money including the extra $600 in weekly unemployment benefits that Congress approved in March as part a relief package to offset the impact of the coronavirus pandemic? That additional payment for the unemployed expired at the end of July.

The extra $600 in unemployment compensation has helped renters continue to pay rent.

Congress is considering new stimulus legislation.

One part of a proposed legislation, known as the Helping Open Properties Endeavor Act, or HOPE, could provide temporary relief for commercial real estate borrowers, such as owners of shopping centers or apartment buildings.

The bill is designed to use money already appropriated in the CARES Act and would be available to distressed investment property owners who can prove they have been impacted.

The legislation would provide for temporary liquidity support for these borrowers. The money would be a subordinate to any first mortgage and come in the form of preferred equity priced at 2.5% for 10 years. It would be administered and serviced by banks and backstopped by the government.

It is too early to know if the HOPE Act will become part of any new stimulus bill, but that is the goal.

A recent report from the Mortgage Bankers’ Association predicted that loan volume would be down 59% this year compared with 2019. Of that reduced volume, 86% is expected to be loans for multifamily properties.

That is no surprise. As the future of hotel, retail and office properties are being vigorously debated by lenders and property owners alike, multifamily and industrial properties remain red hot.

Continued strong collections at multifamily properties has made the sale and financing of apartments competitive.

Apartments are still attracting a wide range of bidders. Fannie Mae and Freddie Mac are offering record low rates that are coming in below 3% for 10 years in some cases.

Both lending agencies require full leverage loans carry so-called COVID reserves in the event of an emergency related to the pandemic. The reserves range from 9 to 12 months and can be released under certain conditions.

Other lenders also continue to offer very competitive pricing, but there are signs of nervousness related to the end of government help and what it means for the future.

Some hotel and retail properties simply cannot support their full debt service currently and are getting help from banks that, in turn, are being given leeway from government regulators.

There is no sign yet of lenders giving up on their borrowers and collateral, but distressed capital is forming on the sidelines like vultures ready to pounce. Distressed capital is essentially money that stands ready to take advantage of borrower and lender distress.

The coming weeks will be important for commercial real estate owners to see if the next stimulus bill gets approved. If the government can keep propping up the economy and offering shelter from the storm, owners and lenders both can expect a little softer landing.

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

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