Over the past couple of weeks, we have started to see the market stratify risk and value. At the beginning of the economic crisis we observed that it was difficult for any capital provider to put out money because the market couldn’t predict what values would be across any asset class or business plan.
Over the past three weeks the market has started to bifurcate how it looks at risk – both defensive and distressed. The defensive asset classes have started to see more traditional capital creep back into the market. The distressed asset classes are starting to see some capital begin to move off of the sidelines and look at transactions.
In the more defensive asset classes, such as multi-family, industrial and self-storage, we are seeing signs of life for the market returning to a healthier state. The market is starting to price bridge loans in a more efficient way and some lenders are considering construction projects again.
We have also started to see movement in the CMBS market. A couple of securitizations have been taken into the market, with all top-tier credit. It looks like CMBS will start to be active again over the next couple of months. Most lenders are indicating that leverage is going to be lower than it previously was, debt service reserves will be required and only very stable assets will be considered.
For the more distressed asset classes, such as hotels and retail, we are starting to see signs of life for financing. Previously the only financing available was for groups looking to buy distressed debt or distressed assets. We have started to see some preferred equity sources and bridge lenders that will look at capitalizing some of these projects for the existing ownership. This is still a thin market, as there is only a handful of capital providers, but the fact that there is capital looking to deploy into these distressed assets is a good sign.
Some loan sales have taken place. We are currently arranging note-on-note financing for a couple of our clients.
One thing that is clear today is that even though there is great distress, unlike in 2008 there is a lot of capital on the sidelines. There are tens of billions of dollars waiting to deploy. Once the distress transactions really start to happen there will be lots of money chasing them.
This should mean that the market will define value fairly quickly. Once value is defined, both the debt and equity markets will become more efficient.
For our clients at BayBridge Real Estate Capital, we are working with them on global capital strategies. We are looking at creative ways to make sure their business plans are going to stabilize or are capitalized to grow through this downturn.
For all of the transactions we are working on now, structure has become as important as leverage and rate. Clients can really win through creative structures and unique capital stacks.
As you look through the summer and toward the end of the year, we welcome the opportunity to help you plan your capital needs.