From the Desk of Kevin Kovachevich
On behalf of the District Capital team, we hope this message finds you and your families well. We understand the hardships this pandemic has caused, and the abrupt changes we all face in our day to day to lives. We've spent these last few days surveying our correspondent lending relationships to understand how the capital markets are reacting and who continues to lend. Our findings and market commentary as of 5:00pm on 3/19/2020 are below:
· Life Insurance Companies – This lender type remains active, yet cautious. Each individual lender is keeping close tabs on spreads and overall coupons as well as alternative investment opportunities. As the Fed cuts rates and uses all its monetary/fiscal policies to help buoy the markets, this doesn’t necessarily mean your commercial loan rates are falling. In fact, the precipitous drop in the equities and fierce corporate bond selloff have pushed corporate A-rated bond rates higher. This creates a viable, liquid alternative investment for many life insurance companies over typical illiquid first mortgage positions. With alternative investments abundant, Life Co’s are quoting deals but keeping pricing 50-75pbs wide of corporate A paper. This means you can expect coupons in the 3.25-4.00% range for most 10-year fixed rate deals. It should also be noted that the life companies continue to lend out to 25 years fixed, despite these historically low rates.
· Agency Lending – Fannie, Freddie, and HUD – the agencies remain open and extremely busy. The agencies reported one of their highest volume weeks of record and continue to provide liquidity to the multi-family markets. Rates for 10-15-year fixed Fannie and Freddie products remain in the mid to upper 3% range. It is important to note that loans are taking longer than normal to close due to travel restrictions and the inconvenience of individual apartment inspections. HUD continues to be there to provide liquidity as well. 223(f) rates are can be found in the upper 2% to low 3% range, excluding MIP.
· CMBS – While a number of CMBS lenders continue to close loans already under application or committed, new business has come to a screeching halt. BBB spreads gapped out to S+800-1000 (normal range was ~S+300) and AAA paper has ballooned to S+200 (last real trade was S+88). Consider CMBS pencil’s down at this moment as pricing is the great unknown. Could you get an application from a CMBS lender? Yes. Will the pricing be wide and subject to change every day during the process? Yes. Our advice….. sit tight on any securitized product until we see some stability in the markets.
· Banks - Banks are the doctors and nurses on the front lines of this fight with COVID-19. They have the liquidity and are ready to help where they can. However, it is important to note, they are not able to help everyone. As with Life Companies, Bank spreads have widened. Further, Banks have shrunk their targets and have become much more selective. Lastly, as is always the case with the banks, relationships are key. Most banks are non-transactional, to begin with. This relationship first, non-transactional approach, has only be exacerbated by the pandemic. Banks are currently examining how they intend to deal with the expected onslaught of calls, emails, and letters from borrowers who face imminent default.
· Debt Funds/Bridge Lenders – Bridge lenders utilizing a CLO model are toast. These typical low cost, securitized lenders are reliant upon a capital source that has essentially blown up. The rest of the market is a “survival of the fittest” as debt funds see margin calls on lines. Debt funds with lines being called will most likely be unable to close on deals under contract. There are still a number of debt funds and bridge lenders active, however, rates are up across the board.
While we are working from home to do our part to #flattenthecurve at District Capital, we are still open for business and want to talk to you about deals. Please feel free to reach out to anyone of us so we can commiserate about this market. Things are changing by the day so by the time we post this, we may have another update to tell you about. Plus, while we love our families, we’d welcome talking some business in between puzzles and Netflix binging. Just please don’t judge when our kids or dogs say hello in the background!
Stay Safe and Healthy,