August 21, 2020
More than five months into the coronavirus pandemic, the economic reverberations are beginning to look like a slow-motion train wreck. We see data today that indicates what’s coming down the pike and continue to hope that a vaccine – like a last-minute track switch – will save the day. In the meantime, the commercial real estate landscape is awash in innovation, apprehension and anticipation.
On the innovation front, owners and investors are making bold moves to stabilize occupancy. Simon Property Group is in talks with Amazon to convert department store space into distribution hubs, The Wall Street Journal reported. Simon recently agreed to buy the bankrupt chains Brooks Brothers and Lucky Brand Dungarees to ensure they stay in business and keep paying rent. Collections continue to vary sharply by asset class. The National Multifamily Housing Council found 86.9 percent of apartment households made rent payments as of August 13, while many retail properties are ranging from 10 to 40 percent.
As for apprehension, nine in 10 American cities plan to slash budgets and services to offset falling tax revenues, according to a survey by the U.S. Conference of Mayors and the National League of Cities. That will mean cuts to schools, police, firefighters, hospitals and other critical services. In New York City, Mayor Bill de Blasio said 22,000 government workers will lose their jobs on October 1 unless the federal or state government comes to its rescue, a scale of layoffs not seen since the 1970s.
In addition, defaults continue to rise, with more than $40 billion in commercial mortgage-backed securities across 1,065 CMBS loans transferred to special servicing in first half of the year, according to an analysis by Fitch Ratings. Fitch is warning of more obstacles down the road with $14.6 billion in loans set to mature between now and the end of next year, and another $21 billion in 2022.
Lenders are financing deals with fiscally strong, existing clients on many multifamily and industrial assets, but steering clear of some hotels, senior housing and student housing amid the COVID-19 turbulence. Certain market participants are retreating from their small balance loan programs given the intensive underwriting required and level of risk. Others are pausing to run stress tests and get their arms around existing portfolios. It’s unclear whether the pullback is a case-by-case phenomenon or indicative of a broader trend.
Larger banks may curtail some commercial real estate lending as they work to comply with the new Current Expected Credit Loss (CECL) standard. The massive accounting change requires financial institutions to implement better controls, more complex methods for evaluating risk, and potentially much higher loan loss reserves. Bank of America, for example, doubled its credit reserves by $21 billion in the first half of 2020. A recent survey of leaders at 557 unique banks said that CRE lending is most vulnerable to the economic fallout of the pandemic.
Finally, the Democratic party has officially nominated Joe Biden and we are just over two months away from a presidential election, adding to the uncertainty. The stalemate continues on a new stimulus package, with an announcement that the Senate would recess until after Labor Day. With the economy floundering and millions of unemployed Americans losing benefits, it’s hardly an opportune time for a vacation. At this writing, seven states had received federal approval to distribute an extra $300 in weekly unemployment benefits created by President Trump’s August 8 executive order, which taps $44 billion in disaster aid funds. But this is a band-aid, and much more will be needed to forestall the coming train wreck.
Please reach out to an MMCC Capital Advisor, who can serve as your go-to intermediary in this disjointed market, providing access to our vast lender database and the broadest array of capital solutions for your commercial real estate needs.