March 5, 2021
The current mood in the market can best be described as tentative. It’s a bit like a beach re-opening after a shark spotting – no one is quite sure where and when to get back in the water. We are encouraged by the approval of a single-dose vaccine from Johnson & Johnson, which is expected to deliver more than 100 million units by June. Although three vaccines are now in distribution, public health officials are worried about a recent uptick in infections as states ease restrictions, and the potential spread of new coronavirus variants. In short, depending on how your investments are positioned, the shark could still be lurking offshore.
We are seeing some banks growing more concerned about lending on office properties and seeking much more conservative terms. Employees don’t appear to be returning in vast numbers to the workplace any time soon, and the flexibility to work from home is likely to continue. In New York, vacant sublet space has risen 91 percent since the second quarter of 2019, according to Costar, and landlords are offering longer rent-free periods in leases.
During Congressional testimony last week, Federal Reserve Chairman Jerome Powell said the Fed is keeping an eye on commercial real estate, including hotels, retail and office, for signs of distress, and the potential impact on lenders. “Where it relates to offices, are more people going to work remotely, and so will the demand for office space feel some downward pressure for a while or even for the long run?” Powell said. “That’s very possible.”
On the positive side, office assets tend to be buffered by long-term leases, rent collections have remained relatively strong and CMBS delinquencies are beginning to decline, according to Trepp data. Some office markets -- such as Atlanta and Charlotte -- are outperforming as a result of in-migration from larger cities, according to Marcus & Millichap’s 2021 U.S. Commercial Real Estate Investment Outlook.
On the positive side, office assets tend to be buffered by long-term leases and rent collections have remained relatively strong.
At this writing the Senate was preparing to vote on the third stimulus package of the pandemic, after the House passed the $1.9 trillion measure last week. The bill includes $1,400 direct payments to many Americans, $400 a week in enhanced federal unemployment insurance and $350 billion for state and local governments. Democrats hope to get the measure signed by President Biden by March 14, when many of the current unemployment benefits are set to expire.
This quarter we have seen the agenda at Fannie Mae and Freddie beginning to play out, with a heavy focus on stabilized B and C multifamily properties offering workforce housing, and fewer value-add deals. Last year the government-sponsored enterprises (GSEs) had lending caps reduced to $70 billion each, down from $80 billion in 2020, with increased emphasis on affordable housing and green properties. The GSEs are cutting back a bit on required reserves to help execute those deals.
As much as $450 billion commercial real estate debt is maturing
this year, and Covid-19 continues to create uncertainty for both lenders and borrowers. Owners and investors may want to reach out to a Marcus and Millichap Capital Corporation professional, who can help sort through financial strategies and options in this shifting capital landscape.