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  • Writer's pictureGantry

Gantry Market Update

First and foremost, we at Gantry wish everyone good health through the COVID-19 pandemic. We as a firm are all working remotely and doing our best to follow the CDC guidelines for social distancing in a continued effort to flatten the curve. We hope you are all doing the same, the best you can. Across the world we are all enduring this pandemic together, and, with our collective effort, we will all get out of this together, hopefully sooner rather than later.

In an effort to provide applicable guidance to our clients, we are providing a detailed look at the market, what lenders are focused on currently, and how to position your portfolio to ride through the storm and capitalize on opportunities as they present themselves in the second half of the year.

Market Update

Over the past 25 days, the lending market has fluctuated wildly as the market has digested the ever evolving COVID-19 news. Various stimulus and quantitative easing programs have been implemented, which has stemmed the tide of extreme market fluctuations. These measures and their overall impact will be felt starting this week and continuing for the next three months. If the virus caseload begins to decrease in the second half of April, additional stimulus will most likely not be needed. If the caseload continues to grow, then Congress may be forced to pass additional stimulus legislation to provide a lifeline to individuals and business affected by the duration of the social distancing strategies. These next two weeks will be the most important to watch. If the pandemic is trending in the right direction, game plans to get business moving again will start taking shape. If the pandemic is still surging and the national distancing policy is extended well into May, April will be a very quiet month for transactions and originations.

Insurance/Pension Fund Update

Current Situation
  • By and large, Insurance Companies have slowly started originating new loans. They have a very limited risk tolerance and their pricing is currently around 2.75% over Treasuries. Their focus is on high-quality deals with little retail exposure and no hotels. They will want updates on all tenants, if they are paying rent, any potential rent relief requests, etc. Corporate bonds (BBB) continue to have elevated spreads (3.0% over), which is dictating the higher spreads for mortgages.

  • For loans that need refinancing now, expect to find a limited reception from life companies with little appetite for cash-out, interest-only and high leverage.

Second Half of 2020
  • As the COVID situation gives way to the 2020 Presidential Race, life companies will remain risk-focused. All insurance companies have large mortgage allocations to meet for the year and all are behind their production targets, but an emphasis on strong underwriting fundamentals and recession-proof assets will outweigh their need to meet quotas. Pricing for high-quality deals should fall slightly as spreads normalize, but pricing will not fall quickly as the Presidential Race will inject uncertainty and the hangover of the pandemic will still be lingering or could be ongoing. Corporate bond spreads will start coming in, but it will take time for corporate balance sheets to heal from the downturn so spread compression won’t be quick.

  • Waiting until the second half of 2020 for financing could prove to be a decent financing strategy; however, we don’t anticipate rates to be back to the lows of early 2020 (sub 3.0%) given the lingering market uncertainty.

CMBS Update

Current Situation
  • For the most part, CMBS lending has ground to a halt. CMBS bond spreads have moved considerably, meaning loan spreads have moved significantly as well. Bond buyers are being extremely selective, given most CMBS pools have decent exposure to hotels and retail, the two asset classes suffering the most. There are some early signs of this market slowly coming back but expect this to be very much a two-steps forward, three-steps back procedure. Every day the news around COVID-19 has large impacts on the appetite of bond buyers, so volatility in this space will be very high.

Second Half of 2020
  • CMBS will be back in the market in late 2020. The big question will be – how have their underwriting parameters changed? The rating agencies were instrumental in the underwriting all CMBS lenders used for the past eight years. That will be the case going forward. If rating agencies develop a new model, with COVID-19-esque parameters built into it, CMBS lenders will be forced to adopt those measures to ensure their bond ratings. Does this mean mandatory debt service reserves? Larger reserves and earlier reserve sweeps around tenant renewals? Enhanced insurance protections around pandemic scenarios? Minimum liquidity held at the asset level, not the carveout level? Time will tell on this but expect a different underwriting world in CMBS going forward.

Agency Lending Update

Current Situation
  • Fannie Mae and Freddie Mac have been through a wild two weeks. Spreads for their loans have moved out over 150 basis points and now come back in over 100 basis points. They have maintained their floor Treasury rates across the board, but all-in pricing for 10-year, low-leverage apartments is in the low 3% range. They have instituted new policies around debt service reserves for higher leverage loans and being less accommodating of interest-only, but by and large, the Agencies are active in the market.

  • For loans that need financing now, this is still a good time to seek Fannie/Freddie execution.

Second Half of 2020
  • Given the government’s strategic backing of Fannie Mae and Freddie Mac, expect to see the Agencies very active through the remainder of the year. Earlier this year, the two agencies were capped at $100B of annual production each. If the market is still disjointed later this year, expect those caps to be lifted to ensure they can provide a source of liquidity for apartments.

  • For loans that can wait until the second half of the year for financing, Agency execution should still be a viable route; however, be wary of changing underwriting guidelines and if the production caps do not get lifted, expect a lack of liquidity in this space starting in early Fourth Quarter.

Bank Update

Current Situation
  • In the early days of the COVID-19 news, bank reactions to the downturn was anything but uniform. We saw numerous banks actively waving in new financing opportunities while other banks quickly shut their doors and stopped all lending operations. Now that the dust has settled, it seems many banks have remained focused on their existing pipelines, their existing portfolios, and their existing clientele. While banks are still actively pursuing new business, quality assets are getting the most attention, with an emphasis on lower leverage, limited cash out and some component of recourse. As the CMBS market evaporated, some banks have used that as an opportunity to cherry-pick quality deals for well-heeled sponsors.

  • Construction appetite still exists but the level of scrutiny around those requests is much higher.

  • For permanent loans and construction loans that need financing now, expect decent market feedback from the banks but expect more conservative underwriting and recourse restrictions for most requests.

  • Many bank lenders are currently inundated with SBA disaster relief requests. We anticipate a general shift towards longer overall timelines for new deals to get closed.

Second Half of 2020
  • Bank activity should ramp up in the second half of 2020. As business activity returns to a more normalized level, banks will be active with new originations and construction financing opportunities should be robust.

  • For loans that can wait going into the Second half of 2020, expect strong feedback from the bank community. That being said, expect stricter scrutiny around the financial strength of the guarantor and global cash flow positions.

We know that these are tumultuous times and the capital markets are volatile. The team at Gantry has longevity in the industry and has been through multiple cycles and we are here to advise and guide our clients through acquisitions and refinancing as the market continues to progress.

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