| As COVID-19 has brought on unprecedented market disruptions, we believe it is vital to keep our clients informed concerning the major lending sources in the market. The following lists each of the major segments that we have provided market info for:
Life Insurance Companies:
The current market seems rather fragmented and specialized. Appetites for different asset types and loan structures vary significantly from lender to lender. Some lenders have really dialed in on fundamentals by lending only on core product/location and have been understandably cautious when re-entering the market. Others have taken a "full-speed ahead" approach and continue to lend on all asset classes with any COVID-19 ramifications reflected in higher interest rates to reflect the perception of increased risk and/or perhaps a 6-12 month payment reserve account.
Life Cos, generally a more conservative group, oftentimes find themselves
pricing in premiums for certain property types due to the pandemic as they perceive these properties as presenting excess risk. Other times they won't price the deal at all. For example, many of the Life Cos are declining to lend on retail properties. The ones that do aren't going to chase rates down even with requests that are lower-leverage and come with strong sponsorship or tenant credit. This serves in stark contrast to the same Life Cos offering sub-3.00% rates for 15-year fixed money on apartments. PSRS just locked rate on such a deal with one of our correspondent Life Cos at 2.82%. Industrial is another asset class that is very much in demand within the lending community. Life Cos are somewhat undecided on office lending given the uncertainty on both current and future work-from-home trends. However, we are still seeing very strong pricing after taking a deep dive into the property's rent roll and thoroughly examining each and every tenant's long-term
viability and getting the lender comfortable with the overall profile.
Banks/Agency:
As lending criteria become more conservative towards new business, banks are relying more on the strength of the borrower and their existing relationships. The appetite for retail, restaurants, and hospitality continues to be minimal, even through their SBA products. Banks, like many lenders, are taking a case-by-case approach to office assets and remain conservative on leveraging those
assets, sizing deals to 60% LTV or lower in some cases. Banks join the broader market in their pursuit of industrial and multi-family assets, as these assets are receiving the most aggressive pricing. The list of banks that are active in construction lending continues to shrink and the amount of equity required continues to increase. The increasing number of construction deals that required extensions previously are slowing the appetite for banks to take on new construction projects.
Currently, the agencies are quoting +$6M deals, 55% LTV or lower, in the high 2s and low 3% range with the possibility of receiving full-term interest-only. As leverage increases over 55%, the rate will rise into the low to mid 3%s with some P&I impounds likely. Under the Freddie Mac Small Balance Loan deals, a request for 65% LTV would see pricing starting in the mid 3%s.
Debt Funds:
The overall theme with debt funds at the moment seems to be two words: “cash flow”. Obviously there are exceptions to this theme, but in general debt funds are looking for in-place cash flow especially when considering office and retail properties. The exceptions relate to multifamily that is in lease-up and/or just
finishing up construction and vacant industrial assets in core, low vacancy markets. Debt funds who originate loans for their own balance sheet are having tremendous years both in originations, up from 2019, and fundraising for new funds as investors anticipate more turbulence leading to opportunity in the months to come. An increase in originations is driven by traditional perm lenders being selective and pulling back on leverage. This has led to borrowers rolling the dice by placing 5-6% non-recourse, interest-only money for a couple of years, betting on the market improving during that time.
Similar to perm lenders, the debt funds are placing additional weight on the Sponsorship track record and financial strength. Value-add multifamily deals are getting a haircut on Pro-forma rents as Lenders are unsure of rent growth for the next few years. As expected, these groups are tracking collections and cash flow almost weekly from application
through closing especially as the first round of stimulus has recently ended.
In regards to terms, leverage is still 5-10% less than pre-COVID but for commercial assets 60-65% LTC is typical while multifamily can get up to 70-75% LTC. Pricing has remained pretty steady with debt funds playing in the L+350-700 depending on the asset, leverage, source of funds, and the complexity of the deal. A continuing trend that we have seen since early Spring, debt funds whose source of capital is selling into the CLO market are facing a liquidity crisis as the buyers for their product have dried up and many rely on lines-of-credit to fund their loans and have seen their lines frozen or limited. A few of these CLO groups have hinted that they plan to be back in the market as early as October.
CMBS:
CMBS lenders are very slowly starting to get back into the market. There have been very few securitizations that have come to market since COVID hit the US, so it's hard to get pricing indications for 10-year money. In addition, the CMBS sector is also
grappling with a very high percentage of securitized loans now entering special servicing as COVID shutdowns impact the underlying collateral.
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