Market Outlook April 9, 2020

Over the past few weeks there has been a tremendous amount of economic uncertainty that has turned the real estate capital markets upside down. There have been 2,600 borrowers representing $50 billion of Commercial Mortgage Backed Security (CMBS) loans that have asked for reprieve on their April mortgage payments.  This metric doesn’t consider agency debt, bank debt, life insurance debt or all of the other lending channels.  We are truly in unprecedented times.

With commercial operating accounts being drawn down at a record pace, bank depository rates have dropped significantly.  These banks are now trying to hold on to liquidity so they can honor their existing commitments for future funding. This has created spillover issues in the rest of the capital markets.

The lenders that have levered their positions with repo lines or warehouse lines are finding these instruments frozen and margin called.  In addition, debt funds that rely on selling a senior interest in their loans to get economic efficiency no longer have a market of buyers.

With all of this being said there still is capital that is being deployed in the market.  There is a stable of lenders that are looking at special situation deals.  These lenders are looking to provide short term financing solutions to clients that are backed into a corner.  Fixed rate financing options are still available.  Options exist for assets where we can demonstrate that the cash flow is stable even in these unstable times.  This money has gotten more expensive by about by roughly 1%.

Right now, cost efficient capital for any construction, transitional assets or short-term bridge financing is on hold.  With the CLO market at a stop and the lack of availability to lever loans, this type of financing is currently extremely limited.

When the world is able to go back to work and businesses start to open, the real estate market can assess how many tenants are paying rent and how many mortgage payments are missed. This information will lead us to what real estate values are.

We think that when we get to this point, we will see the CLO and CMBS bond buyers become active again quickly. We also think that banks will be gaining deposits again and with the Fed lift of the depository ratios, the banks will begin lending again.  We also think that this downturn is going to activate parts of the equity markets. For the past two years we have seen yields tighten and we had an increase of debt vs. equity.  Expect to see that pendulum swing back.

At BayBridge Real Estate Capital, we are constantly obtaining market information and data.  We are helping clients and prospective clients walk through the nuances of the capital markets that impact their deals and future pipelines.

If you have a special situation or critical need, please reach out. We will do all we can to help you solve the problems that are arising in these unprecedented times.


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