January 11, 2021
A Year of Potential Opportunities and Risks
On Wednesday we witnessed the culmination of a year of exceptional disruption and turmoil, as protestors stormed the U.S. Capitol building, delaying the count and certification of the electoral votes. Fortunately, Congress confirmed President-Elect Biden on Wednesday night, a critical step in reassuring the nation that America remains committed to democratic values. Now it’s time to get to work, and collectively solve the health crisis and economic challenges facing our country.
Democrats took control of the Senate after winning two seats in the Georgia runoff election by a narrow margin, and some analysts have suggested the commercial real estate industry could face new hurdles. This may include higher taxes, elimination of the 1031 tax exchange and more stringent reserve requirements for lenders, given the losses fueled by the COVID-19 crisis, which could dampen activity. At the same time, President-elect Biden has pledged to distribute 100 million vaccine shots in his first 100 days in office, and more aggressive national efforts to fight COVID-19 could accelerate the “swift and sustained recovery” some economists are predicting.
In addition, stimulus relief – while half the size of the previous package -- is beginning to percolate throughout the economy, and with a Democratic-controlled Senate, there is a possibility of another program in the future. The $900 billion plan passed in late December provides direct checks to Americans, extends unemployment benefits, and provides $25 billion in emergency rental assistance, giving a potential boost to the multifamily and retail sectors. Small businesses will also benefit from an additional $284 billion in Paycheck Protection Program (PPP) funds, and expenses covered by previous PPP loans can be written off, amounting to more than $100 billion in tax savings for participants.
Moreover, roughly $50 billion earmarked to procure and distribute vaccines and improve testing and tracing could speed a return to workplaces. Offices in central business districts have struggled, with vacancies in midtown Manhattan rising to the highest levels since 2009. Hopefully federal stimulus funds will accelerate the slower-than-expected rollout of the vaccine. This is essential, particularly given the unexpected loss of 140,000 jobs last month, the first decline in payrolls since April 2020 amid a surge in COVID infections.
The industry does face some significant headwinds. Some $430 billion in real estate debt matures this year, and up to $126 billion in commercial real estate could sell at distressed prices, according to Co-Star data analyzed by Bloomberg. Hardship for some will create a significant buying opportunity for others, and investors across the globe are raising capital to invest in distressed deals.
Overall, we anticipate a steady supply of capital in 2021. Many lenders will look closely at factors such as a borrower’s prior relationship with the institution, historical performance and creditworthiness. Watch for last year’s more stringent underwriting criteria to continue, with higher debt service coverage, lower or static loan-to value-ratios, and greater cash reserves. The players may shift, with lending caps at Fannie Mae and Freddie reduced to $70 billion each, down from $80 billion in 2020, and renewed emphasis on affordable housing and green deals.
The coronavirus pandemic has impacted many asset classes and investors, and we don’t believe we’ll see a major change over the next two quarters. But real estate is obviously a long-term play, and investors who make smart, clear-sighted decisions early on will find rewarding opportunities. Whether you anticipate profit or peril in the months ahead, Marcus & Millichap Capital Corporation can provide strong guidance to manage risk and help execute on opportunities. Please reach out to your MMCC professional to help sort through your financial strategy and options. We wish you a healthy and prosperous 2021.