The uncertainty surrounding the coronavirus pandemic and its effects on market dynamics has created a sense of unease for commercial real estate investors. Let’s look at the lending environment and various loan products to gain clarity in relation to self-storage and other key sectors. I’ll also share practical wisdom on how to move forward.
Commercial Mortgage-Backed Securities (CMBS)
CMBS loans are for property investments ranging from $2 million to $100 million. The format is to book the loan and then bundle it to sell off as a securitization. What makes this challenging right now is how tied CMBS is to the stock market, which seems to be in disarray.
Every group will more than likely widen spreads (raise rates) and probably lower the loan-to-value ratio. Furthermore, you’re going to see a consistent move away from the hospitality sector. In addition, loan closings will likely take longer, as due-diligence travel slows. Chances are the markets will force lenders to re-trade at the original terms.
Takeaway advice:
- If you’re in a purchase situation, begin to negotiate now with your sellers for more time. Don’t wait.
- Consider other lending options, such as life companies and banks.
Life-Insurance Companies
Life companies are generally balance-sheet lenders that focus on traditional office, retail, industrial and apartment loans. They typically stay true-blue during good and bad markets. The reason is they’re always fairly conservative in their underwriting.
Right now, the general consensus is “business as usual.” Life companies are closing loans and don’t expect that to stop. The only thing that’ll probably change for them is pricing, since the 10-year Treasury is on an emotional rollercoaster. Response times will probably be slow because people will be working out of their homes.
Takeaway advice:
- Use this lending type as much as you can and quickly lock your rate. Don’t play chicken on rates.
- Keep communication flowing and do everything you can to be diligent on closing timeframes.
Banks
Banks generally focus on relationship opportunities and look for long-term clients. Their focus is to gain business deposits and work toward local, community relationships.
Right now, banks seem to be optimistic that this crisis is “a blip on the screen” and should settle down in a few months. They’re keeping their eyes peeled for clients in vulnerable industries to see how they can help. The only thing you may see change is pricing. Other than that, they’re ready to lend.
Takeaway advice:
- Be proactive in your overall business.
- Communicate with your bank early if you’re concerned about your business.
- Work toward getting your loan package very clean and presentable.
Small Business Administration (SBA) Loans
SBA lenders are focused on executing 7(a) and 504 loans. They work with borrowers are trying to expand by buying, refinancing or building operational facilities. Right now, the only SBA government feedback is a “disaster relief fund” set up for people who fall victim to COVID-19. For more information on that program, visit the “Disaster Assistance” page on the SBA website.
Most SBA lenders have expressed continued interest with proceeding with financing, business as usual. They are, however, probably shying away from the hospitality and restaurant arenas.
Takeaway advice:
- If your business is susceptible, be proactive and call your bank. Start looking into short-term, disaster-relief programs.
- If you’re receiving a loan, give yourself a few options as a backup. In addition, negotiate timelines with sellers, since procedures are going to take longer during the crisis.
Bridge Loans
Bridge financing focuses on lending against income properties in a turnaround situation. It caters to those who are going to renovate and lease up properties, with the intent that loans will be taken out in 24 to 36 months.
All of the bridge balance-sheet lenders are fine. If they aren’t CLO (collateralized loan obligation) lenders, they’re proceeding with loans. CLO lenders will probably play things a little closer to the vest. With markets a little shaky, they can’t sell bonds. In addition, you’ll most likely see lenders put a floor on their internal interest rates; money is getting too cheap.
Takeaway advice:
- Look for great opportunities in this area and capitalize on them. It’s a great time to buy turnaround deals.
- Find out if your lender is CLO. This could help you determine where to do your loan.
Agency Financing
Agency lenders (Fannie Mae and Freddie Mac) predominately loan against multi-family properties that need permanent financing. This can include fixed rates for five, seven and 10 years on a 30-year amortization.
Most agency lenders, which have been around for a while, are proceeding with their loans. Where things will probably change is in interest-rate pricing. As it stands, the markets have been volatile, with rates falling too much. Most groups have actually come back and re-traded loans that are in process. If you were at a 3.75 percent rate, then you might be bumped 15 to 20 basis points. This occurs when the rate is too low for them to make money.
Takeaway advice:
- Be prepared for interest-rate pricing to change, but work with your agent to fight for things to stay. Leverage your relationship to maintain pricing.
- Be diligent about closing timeframes. Make sure you aren’t lagging when submitting information. Lenders will go to bat for borrowers who are cooperative.
Dealing with the novel coronavirus is an unprecedented situation in our lifetime. Though the uncertainty can create anxiety for investors, my sense is it isn’t necessary to feel that way. The best plan is to gain wisdom, strategize and act.
Dave Kotter is the principal of Integrity Capital LLC, a Scottsdale, Ariz.-based commercial-mortgage brokerage that’s closed more than $554 million in loans. He’s helped self-storage owners find financing nationwide. For more information, call 480.422.4525; visit https://www.integrity-capital.com.
