April Capital Markets Update
We hope this market update finds everyone safe, healthy and caught up on all your favorite Netflix shows! As the days quarantined continue to mount, and our patience diminishes, we wanted to keep everyone up to speed with what we are hearing on the street. District Capital is so very grateful for the deep relationships we have developed over our collective years’ experience and it is truly uplifting to be able to jump on a quick call or zoom with most of you to check-in and commiserate. Thank you to all our lenders and industry leaders for continuing to flood us with information and up to date changes in what seems to be an ever-changing landscape. Below, we have tried to capture the current state of each CRE lending source as they stand today, Friday, April 17th. In addition to the market reconnaissance for lending, we also have a strong understanding of the servicing market and how lenders are handling distressed loans.
All lenders, regardless of their specialty, are currently buried in modification requests. District Servicing, an arm of District Capital, has a team of workout professionals ready to assist our clients and non-clients with any modification needs that may arise. Crystal Kalinowski leads the District Servicing team with over 20 years’ experience and was an industry work out leader during the 2008 financial crisis. Her experience and relationships are invaluable in times like this. We encourage you to give us a call to discuss your deal, even if we didn’t originate it. We may not be able to help you directly, but we can provide some insight during these uncertain times.
Agency Lending Update
Let’s start with some good news. Agency lending is active, and spreads have come screaming in, thanks in part to the Fed’s direct purchases of agency bonds. Both Fannie and Freddie have instituted new policies around upfront debt service reserves for higher leverage loans. Interest only requests are only being granted for lower leveraged deals. All in coupons are very attractive in the low to mid 3% range, depending on your leverage and underwritten DSCR. Don’t count on Fannie or Freddie stretching to full proceeds as there is still some concern regarding future underwriting and collection levels.
Freddie SBL (small balance) lending has hit some speed bumps. There have been developing program changes which are designed to shift risk to the seller/servicers who procure loans for Freddie Mac. This is causing any Freddie SBL lender which is also a regulated bank, severe heartburn as this risk shift is viewed by bank regulators as a balance sheet issue thus requiring reserves against this potential future liability. These changes are fluid and rapidly changing by the day. We expect to have additional updates and clarity next week when the next scheduled Freddie SBL securitization is set to trade.
Insurance/Pension Fund Update
Insurance Companies continue to originate; however, they have a very limited risk tolerance. Their focus is on high-quality deals with little retail and zero hotel exposure. As conservative balance sheet lenders, they will want frequent updates on the condition of all tenants, who’s paying rent, any potential rent relief requests, etc. Corporate bonds drive the pricing of the life companies and we’ve seen corporates continue to come down from the highs posted a few weeks ago. The Federal Reserve and other central banks have stepped in to start buying corporate bonds, which is helping to support prices. We are currently seeing life insurance companies price deals with spreads in the 275-350bps over 10 Year Treasury. All in coupons are in the high 3’s to mid-4% range depending on the lender, collateral and debt structure. Some of the smaller balance life companies continue to lend as they seek some level of recourse from the sponsor.
CMBS lending remains suspended due to the continuing uncertainty in the market. Some lenders have even begun furloughing originators as new production is non-existent. Pricing in the secondary market appears to have settled following action by the Fed, which offers low-cost financing to investors in the triple-A-rated securities of multi-borrower CMBS transactions. This was absolutely needed as spreads were a runaway train. The move by the fed brought down spreads on the super senior paper to roughly 150 bps over swaps. In comparison, CMBS has traded in the 75-90bp range over the last twelve months. The market is still disjointed but there are signs of life. Goldman and Citigroup are bringing an offering to market that was previously scheduled to be sold prior to the meltdown. To alter the offering, they are removing all the hotel and some retail high-risk loans from the pool. While this print will not be a typical CMBS deal, it will provide a test of investors appetites for fresh CMBS paper. We don’t anticipate a successful execution of this pool will necessarily lead to a resurgence of new originations; however, it will be the first step in testing the market. We absolutely need CMBS back quickly as CMBS fills a significant void in the market, especially when balance sheet lenders and banks grow more and more conservative. While securitizations are an important part of getting back to normal, the biggest test will be in the actual numbers. Which tenants make and which don’t. The sooner CMBS lenders can start to assess their cash flow risks, the sooner we can get back to issuing new debt.
Bankers continue to the be front line of defense, stepping up their processing and filling the entire $350 Billion of SBA PPP funds. This herculean effort has required an all-hands-on-deck approach, leaving the banks thinly staffed for any other loan requests. For the most part, the smaller community banks are not currently seeking any CRE lending opportunities and 100% focused on PPP transactions and loan modifications. The larger banks are also laser-focused on PPP, but they are selectively lending on the right relationship with high-quality assets. Transactional business is dead, its relationship only with the banks and even if you have a relationship, gaining CRE lending will not be an easy road for some time.