2020 CMBA Western States CREF Conference Takeaways

September 10, 2020

Take-aways from the Mortgage Bankers Association virtual portal conference on September 9th-10th:

As a result of COVID-19, the immediate future of the commercial real estate market remains uncertain
In the midst of the current recession, investment activity is down by 68% nationwide
Retail, hospitality, student housing, and office properties have been hit the hardest
As rents continue to fall, short-term lease renewals are becoming increasingly common
Negative absorption is on the rise
In the past, value-added properties were appealing to lenders, but now, the future is unpredictable and each origination has become deal-specific
Properties in tertiary markets, coupled with early rollover are the most challenging
Lower leverage is the new norm – capped at 60%-65% LTV on most property types

The Future of the Office Market:

The Future of Retail, as we Once Knew it:

Over time the retail sector will bounce back, although it will look different.
The Amazon store with the elimination of sales clerks will become the gold standard of retail
“Ghost Kitchens” will be designated to patrons, in which there is not a retail storefront. Food will be prepared from a warehouse, increasing profitability
Urgent Care facilities and grocery stores will become complementary tenants
Retailers with an online presence are more likely to survive
What isn’t working is daily shopping, in which people need to stand 6 feet away from each other
The future of movie theatres is uncertain, especially with the advent of Netflix and other networks
Developers will need to avoid placing tenants with overlapping services such as COSTCO, Walmart, and Grocery Stores in close proximity to each other
“Last mile” distribution centers are being designed so that the consumer can pick up products from a separate warehouse location
Smaller tenants who cannot open their doors for business due to COVID may struggle
Many stores are morphing into the grocery business such as 7-11 & Dollar General
Outdoor dining will become the new norm

What’s Happening in the World of Government Sponsored Enterprises (GSE)

While other lenders are waiting on the sidelines, Fannie Mae & Freddie Mac have remained active
Rates are at all-time lows
HUD loans are in the 2.00% range fixed for 35-40 forty years
Multi-family properties remain unphased
Analysts are predicting a 6% decline in rent, which probably will not get back to pre-COVID rents until 2022
Acquisitions are getting done in the 65% LTV range, or higher
The future of student housing seems promising, even though most of the learning is virtual. We will have a clearer perspective on student housing within the next 45 days or so.

Borrower and Lender Experiences with COVID-19. Where do we go From Here?

Lender forbearance pertaining to hotels and retail properties are more prevalent, compared to office, industrial, and multi-family
As life companies and banks are pro-active in accommodating borrower’s, CMBS lenders have been the least flexible when it comes to forbearance
Toward the end of 2007, lenders became aware that a recession was on the horizon. Concurrently, up until mid-March, it was business as usual in the banking industry. Shortly thereafter, the pandemic came on full force, and consequently, lenders were inundated with forbearance requests.
As vacancies increase, what was once a 65% loan request, will evolve into an 80% loan request. Consequently, when the loan matures and the borrower needs to refinance, lenders will be asking the borrower to come out of pocket, in order to cover the shortfall.
As challenges occur, the role of the mortgage banker will be instrumental

Market Overview – The Glass is Half Full:

Once a vaccine is implemented, the economy is expected to bounce back
Most lenders are placing debt on industrial, multi-family, and office properties
Grocery store sales are up 30%-40% since COVID-19
Domestic and international money remains available
While the pandemic has affected many businesses, it has also brought on the triumph of technology
Although it seems evident that many tenants will not be able to weather the storm, those businesses with an online presence will continue to stay afloat
Although retail, office, and hospitality sectors have struggled, industrial and multi-family properties continue to thrive
Apartments are expected to be in demand in spite of declining rents
As e-commerce stores continue to thrive, retail businesses will remain essential
The majority of tenants continue to pay rent, including those who are working from home
The senior housing market looks bright, despite the terrible outcome due to the pandemic
As interest rates remain at an all-time low, the housing market has surged
The Feds are NOT committed to increasing rates, even if inflation rises
The CMBS market has recovered dramatically since March
CMBS rates are in the mid 3.00% range. This is close to where they were pre COVID.
Retail will survive, although it will look different. A new process will begin to take place
Partnership across the board with the city, developers, and lenders will begin to take place
Once the recalibration has occurred, we will begin to see the light at the end of the tunnel

Jeff Glenn
Senior Vice President
D: 916.565.7487
jeffglenn@slatt.com
Connect with Jeff on LinkedIn Here

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