Debt Capital Markets Update | August 3, 2020
Overall activity in the CRE debt capital markets has increased significantly since the height of the COVID-19 pandemic, driven largely by the current low interest rate environment and the adaptation of revised lender underwriting criteria to mitigate ongoing concerns relating to the potential current and future impacts of COVID-19 on the U.S. economy. A recent survey conducted by the Structured Finance Advisory Group that included over 200 responses from a wide spectrum of debt capital providers indicated that ~92% of those surveyed are actively entertaining new loan origination opportunities, as compared to ~65% in April. Additionally, respondents were essentially split between those who expected the debt capital markets to “normalize” by Q1 2021 and those who are anticipating a longer recovery time.
Multifamily, industrial and office opportunities are currently the focus of most new loan origination interest with retail and hospitality still struggling to gain momentum. Local and regional banks continue to be much more active and competitive than the larger national money center banks that continue to struggle with portfolio balancing issues caused by the large number of corporate credit facilities that were drawn down at the outset of the pandemic. Banks are currently quoting high-quality deals in the 60%-65% leverage range in the low to mid 3% range on 5-7 year executions. With AAA corporate bond yields trading at historic low levels, life insurance companies are able to price deals at very attractive levels for long-term fixed rate pricing. Core deals at ~50% LTV are being priced in the high 2% to low 3% range for 10-year fixed rate executions. CMBS lenders, while completely shut down from March to May, are now actively pursuing new origination opportunities. Average leverage on new issue CMBS has decreased to 60%-65% (as compared to 70%-75% pre-COVID) with interest rate pricing in the mid to high 3% range. Debt funds that were not highly levered going into the pandemic and/or don’t rely on secondary market executions are actively pursuing new bridge loan opportunities on multifamily, office and industrial deals and selectively entertaining retail and hotel originations. Average leverage on debt fund executions has similarly declined with most transactions getting done in the 65%-70% range (down ~10% from pre-COVID levels). Debt funds are regularly pricing deals in the mid to high 4% range.
The current low interest rate environment, in large part due to the record issuance of U.S debt securities (~$3 Trillion) and the Fed purchase of ~60% of that issuance, is expected to drive CRE transactional activity through the end of the year. Interest rates are not expected to increase materially for the next 6-12 months as the Fed is expected to keep interest rates artificially low to help pull the U.S. economy out of a COVID-created recession.
Please don’t hesitate to reach out with any questions. We’re happy to provide project specific financing guidance upon request.
