Like most other recent conferences, this year’s MBA-CREF/Multihousing Conference went virtual due to the pandemic. While the CRE community continues to adapt to the virtual environment, most participants are looking forward to meeting again in-person and returning to real social interaction.
Our Baltimore office virtually interacted with most of our capital providers, including life insurance companies, pension funds, CMBS shops, Fannie, Freddie, FHA, banks, mortgage REITs, debt funds, and private equity firms. The overall market sentiment for commercial real estate investing remains cautiously optimistic. Rates remain at some of the lowest levels in history and a near-record volume of capital needs investing. Most capital sources believe 2021 will approach 2019 volume levels of investment while others thought 80% +/- of 2019 a more reasonable estimate. Some additional takeaways:
Lender portfolios weathered 2020 and its challenges in relatively good shape. Most loan modifications were in the retail and hospitality asset classes while the rest of CRE held up better than expected. Hotels were hardest hit from the COVID requirements around the country. Regional malls and big box centers have their challenges and many malls will be repositioned or redeveloped as the retail landscape changes.
- Rates are low! Many long-term multifamily and industrial loans are below 3% with lower leverage deals getting down to 2.50% or less for 10 or more year term. Interest Only (IO) is also available for some or all of the term depending on leverage level.
- As their outperformance continues, multifamily and industrial assets have and will continue to get the best pricing and most favorable loan terms. Most lenders are targeting these asset classes and are willing to stretch the terms of their normal lending program to beat the competition.
- Retail and office assets continue to be financed but underwriting is more conservative than before the pandemic started. Everyone is unsure of the performance of these assets over the next few years so lenders will rely on CRE fundamentals for these properties. Secondary and tertiary market locations will require creative structures and access to many capital sources to find the right loan.
- Freddie Mac, Fannie Mae, and FHA (agency lenders) provided steady liquidity during the economic problems caused by COVID. Fannie and Freddie loan volume hit all-time highs in 2020. NorthMarq represents all three of these capital sources and competition remains intense as these multifamily lenders try and top one another on pricing and other loan terms in a determination to win the deal.
- The agency lenders have pulled back considerably on their specialty products such as pre-stablized, value-add, and student housing. These products are expected to come back to pre-COVID levels once we return to a more normal business environment. Life companies are finding success in winning multifamily business by filling this void.
- Life companies trying to differentiate themselves from the pack now offer more liberal terms such as prepayment flexibility, forward rate locks for longer periods, and limiting carve-outs to borrower entity only. Life companies now offer terms from floating rate debt with very flexible structures to terms as long as 40 years with a 40-year amortization.
- CMBS lenders want to lend more but have had difficulty finding deals. Most CMBS lenders hit the pause button in 2020 due to market conditions and economic uncertainty. Total volume for 2020 finished around $54 billion, down significantly from the $95 billion forecast. CMBS lending in 2021 will likely be around $60 billion given the current market and the continued struggle of hospitality and retail assets which contribute a significant volume to CMBS.
- Capital for bridge lending and mezzanine financing from life companies, private equity firms, mortgage REITs, and debt funds is still prevalent. CMA is now tracking over 150 lending sources who invested $10 million or more in bridge loans in 2019. Many of these lenders prefer multi-family and industrial assets but will lend on other asset classes as long as the sponsors have a strong business/exit plan.
In summary, the global pandemic, remote work and the lack of business travel presented difficulties to all market participants resulting in lower investment sales volume and lower mortgage volumes for all lenders except the GSEs. In 2021, most participants anticipate things being a bit choppy for the first half of the year as we continue to navigate COVID with the aim of returning to a more “normal” business environment later in the year.
Lenders must invest to meet the portfolio returns necessary for their business. A lot of capital sits on the sidelines waiting for more clarity on the pandemic and improving economic fundamentals. We fully expect the second half of 2021 and all of 2022 will see higher investment sales volume and lenders aggressively pursuing a wide array of loan opportunities.