Managing Expectations as Capital Markets Evolve

I would first like to wish everyone health and safety during this time. It is difficult to cope with the health aspect of this situation on its own, but adding the economic challenge that everyone is facing makes it that much more difficult. Everyone is in the same boat, and I hope that we can all support each other to get through this together.

The current capital markets situation is evolving quickly. I had written a piece about 10 days ago, and candidly it is, for the most part, irrelevant at this time. What I am writing now reflects real-time information as of March 23.

Last month, the 10-year Treasury hit record lows when it dropped from 1.30% to below 1.00% and then all the way down to 0.32%—an all-time low. To put this in perspective, the lowest 10-year recorded was in 2016 at 1.32%; in 2008 during the financial crisis, the low was 2.15%. While the Treasury seemed to have recovered to a yield over 1.00%, it is now down to around 0.75%.

For the past 4-8 weeks it was a great time to lock in interest rates on fixed-rate loans. Low Treasury and low spreads were plentiful. However, for the past couple of weeks, certain capital has frozen up with some lenders hitting the pause button and some raising their mortgage rates to reflect their perception of risk.

Some lenders have still been actively signing up deals, particularly the GSEs for multifamily properties. Other lenders are also saying it is business as usual, but I believe this is based on their expectation that things will start to normalize in the next month or so, not based on what is happening presently. The challenge/unknown will be with how the properties are operating at the time that the loan is ready to fund. Because of municipal ordinances prohibiting landlords from evicting tenants, it is expected that many tenants will not be paying their rent in April due to lack of funds from lost jobs. Conversely, landlords will also face challenges in paying their mortgages due to a lack of NOI.

I believe that new business will start to slow down in the coming days/weeks as the focus shifts to preservation.

At NorthMarq, we are at the forefront of changes that are taking place in the market, both on new business and keeping abreast of the various government policy changes. We are in constant communication with lenders and believe that an industry-wide solution will emerge to address the impacts of COVID-19 and the effect it is having on the economy.

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