Capital Corner: Solving Capital Problems Remains Possible in Today’s Market Challenges

Into the fourth week of the economic slowdown due to the Covid-19 pandemic, the commercial real estate market continues to adjust to new parameters for lenders and new requirements for borrowers/investors. Good news came last week from a list of new lenders re-emerging into the market and widening their perspective on acquisitions, property type, and submarkets. With more lenders becoming active, liquidity is leading to an increase in closed transactions, even some that only a week ago seemed to be in peril. New lenders are stepping in with new solutions even if the original lender backed away.

Our overall message is to remain proactive on any active acquisitions and attentive to potential recapitalization or refinancing opportunities. With the uptick in lender interest, we can connect you to a wide variety of diverse capital sources to redirect and move forward. Transactions remain property and lender specific, but there are solutions for each situation.

LENDER UPDATES

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. This is the third week in a row that pricing has contracted, with rates locking in as low as 3.25%.

The agencies continue to focus on closing mission-driven business with significant pricing reductions granted for those deals. Acquisition lending has also increased, as opposed to primarily refinancing from two weeks ago. We are seeing price renegotiations between the buyers and sellers due to market pressure.

FHA/HUD
The HUD/FHA pipeline continues to expand to an unprecedented level, and is viewed as a safe-haven capital source with many borrowers considering this lending source for the first time.

HUD continues to provide some of the highest leverage debt for multifamily and healthcare transactions, with loan/value and loan/cost maximums up to 85% for market-rate deals, and up to 90% for affordable transactions. Rates for refinance/acquisition loans are currently approximately 2.75%, and rates for new construction deals are in the neighborhood of 3.40%. Late last week, HUD issued new guidance for refinance/acquisition loans which, in summary, will require a nine-months debt service reserve for market-rate deals, with a six-month hold period or achievement of minimum DSCR (1.176X) for three consecutive months, whichever occurs later.

Life Insurance Company Update
Many life company lenders came back into the market last week, and even some of those that were in the market all along adjusted to widen their purview. These life companies are getting more comfortable with the situation, primarily due to the increased stability in the corporate bond markets. .

While there may be some changes in term or programs, the return to reviewing transactions by sidelined life companies has brought increased competition and better pricing. Pricing from the life company platform are locking and quoting in the mid-3%, slightly better to two weeks ago where a 4% rate was more common.

Equity
One change in the market is the volume of joint venture equity looking for investment opportunities. Sponsors seeking to acquire deals that were unwritten after the start of the Covid-19 economic slowdown may need additional equity sources due to a diversity of investment thesis. They have the opportunity to develop new equity relationships due to this heightened level of activity. Most equity sources remain focused on multifamily and industrial properties without regard to the current virus impact in particular markets.

These investors have been seeking to expand their deal volume by sourcing new sponsors, especially those with acquisitions originated in today’s environment. Preferred or hybrid-preferred equity is focused on solving capital problems with the benefit of a fixed-cost of capital and thus less costly than traditional joint venture ownership.

The other area of growth for equity sources is focused around recapitalizations. If the sponsor’s business plan indicated a sale in the next 12 months, consideration of a recapitalization may better achieve creating liquidity while maintaining control.

In Closing
Our advice continues to be to engage with your NorthMarq debt and equity expert, as we continue to find solutions in every market condition. Our vast and diverse capital sources each have different perspectives on their perfect opportunity for today, and we want to continue providing you with the best capital solutions today, tomorrow, and well into our bright future.

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