As we enter the later part of April and the recognition of the continued COVID-19 impact, our world is settling into a new reality, and hopefully not a new normal. Our goal with this weekly article is to offer ideas for transacting business and share how investors and lenders are reacting to the market challenges.
This week, our focus is on Equity as part of the capital stack. NorthMarq’s Equity Advisors Group recently discussed the current market dynamics of equity investors who are participating in today’s opportunities. The group noted that investor activity on acquisitions where deals under contract at pre-stay-at-home-order levels left some buyers without an equity partner at the closing table. Preferred equity, at an attractive fixed-rate, was a viable alternative for many of those buyers. On the new construction front, investors who have been historically active indicate that new projects not already started are on hold until there is greater market clarity. In order for these to happen, there will need to be an adjustment to the economics of the deal with exceptions for core locations. Equity commitments on projects that are underway with a future delivery date appear to be unaffected.
Equity from institutions and family offices are sending us “Post-COVID” investment parameters, as they have turned opportunistic in nature. They are using terms like “rescue capital” and “distressed development” to describe the deals they are considering for investment. We feel that some may look for outsized returns, which may lead to a “price discovery” period where deals are re-negotiated and return expectations are adjusted on both sides. The opportunities they reference are going to be on a case-by-case basis, but capital is still available and multiple options will be available for borrowers.
These investors are on the hunt for new sponsors, especially those with acquisitions under control or promising development deals that need time for the market to settle. Sponsors may also find opportunities for recapitalizations. If the sponsor’s business plan indicated a sale in the next 12 months, recapitalization may be a better fit given the potential for increased vacancy. Since the sales market is currently disjointed, the sponsor can recap with a new equity partner, leveraging the equity to monetize and retain operations.
The returns will be in the mid-to high-teens for most investors, with those returns moving up and down depending on the deal, the market, and the opportunity.
Life Company Update
Life company lenders continue to get comfortable lending in this market. Most of our correspondent life companies are expanding their appetite to lend as compared to the last few weeks. These life companies are getting more comfortable with today’s situation, primarily due to the increased stability in the corporate bond markets. They will be cautious, but the interest in finding deals is definitely picking up.
While there will be some changes in terms and investment parameters, the return to reviewing transactions by sidelined life companies has brought increased competition and better pricing. Life company pricing that we are locking and quoting is in the 3.25% - 3.90% range. Floors vary between the lenders, so it is good to cover the market as the rates and the institution's lending are constantly changing.
Fannie Mae & Freddie Mac
Spreads from Fannie Mae and Freddie Mac have generally remained stable, with a slight tightening bias over the past two weeks. Pricing has stabilized over the past several weeks, with rates locking in as low as 3.15%.
The agencies continue to focus on closing mission-driven business with significant waivers granted for those deals. Acquisition lending has also increased, as opposed to primarily refinancing from two weeks ago. Terms at closing remain the same as when the loan was put under app, although we are seeing price renegotiations between the buyers and sellers due to market pressure.
While FHA/HUD continues to have a very robust pipeline and remains a safe-haven capital source, pricing hasn’t experienced much change. Rates have declined slightly over the past week (5-10 basis points), and we are seeing 223(f) deals around 2.70% and 221(d)(4) deals at approximately 3.30%. The NorthMarq team expects to see additional news/update from HUD headquarters in the next week or so.
It has never been more important to engage NorthMarq’s experienced equity group to source different investors for your real estate needs. We can engage with you to find solutions even in today’s fluctuations, given our access to vast, diverse capital sources who each have different perspectives on the perfect opportunity for today.