The players have shifted positions, in some ways rather significantly, but the game continues, according to Beyond the Global Health Crisis, a special fourth-quarter capital markets report from Marcus & Millichap.
As some categories of lenders have stepped back from commercial real estate, others have stepped up their lending. And as these adjustments take place, investment activity is making a steady recovery and low interest rates help to motivate investors.
As the end of a tumultuous year approaches, the report notes, “the lending landscape has vastly improved from the onset of the pandemic, which brought lenders and investors to pause as they assessed the impact of the coronavirus.”
Further, proactive steps by the Fed have kept debt capital “far more abundant than during the global financial crisis.” Both buyers and lenders have become more active since the second quarter, though sales activity is down substantially year-over-year.
Unsurprisingly, many lenders have tightened underwriting criteria, reducing the options for some borrowers. “While liquidity has remained ample, loan-to-value ratios contracted as the health crisis unfolded, now resting in the 50 to 70 percent range,” depending on the deal and borrower, according to Marcus & Millichap. Alongside this, debt service coverage ratios have shifted, rising to the 1.6x–1.9x range.
The challenges of change
Compared with 2018’s lender mix, that of mid-2020 showed a huge drop in CMBS, a steady rise in the role of regional and local banks (across most property types), and a large increase in activity by government agencies. The latter, Marcus & Millichap says, “were aggressive originators in recent quarters to account for a much larger share of lending activity.” Still, multifamily mortgages now often require debt service reserves and much underwriting assumes no rent growth for about the next two years.
Product types favored by lenders are multifamily and industrial. The report states that lending by banks and non-agency lenders most often involve five- to seven-year loans with rates in the upper-2 percent to mid-3 percent range.
As to office properties, most lenders are more selective, despite strong rent collections. Suburban office deals are preferred, while buildings in larger downtown markets can require loan-to-values of nearly 50 percent for.
Life insurers reportedly have been targeting lower-leverage office deals, as well as multifamily and single-tenant retail assets.
“The Federal Reserve’s commitment to keep the federal funds rate near zero through at least 2023 should hold interest rates near historical lows over the coming quarters,” the report concludes, “providing commercial real estate investors with compelling risk-adjusted returns in contrast with other asset classes.”