CRE Finance in an Uncertain World

MBA hosted a webinar on Friday, March 27 with commercial real estate finance industry leaders to discuss COVID-19’s impacts on the industry.

The webinar represented the second of a bi-monthly series. Speakers included:
–Brian Hanson, Managing Director with CWCapital
–John Lippmann, Head of Structuring with New York Life Real Estate Investors
–Stacey Ackermann, Partner with K & L Gates
–Alan Kronovet, Executive Vice President and Head of Commercial Mortgage Servicing with Wells Fargo
–Alan Williams, Senior Vice President with KeyBank Real Estate Capital
–Jamie Woodwell, MBA Vice President of Commercial Real Estate Research
–Michael Flood, MBA Senior Vice President of Commercial/Multifamily

Flood provided a policy update highlighting the $2 trillion stimulus signed into law on Friday that aims to boost a U.S. economy staggered by the coronavirus pandemic, emergency actions taken by the Federal Reserve (see below) and MBA’s continued advocacy for items that remain unaddressed in the commercial real estate finance ecosystem.

The Fed stimulus has had significant effect, but the market remains choppy and some asset types including commercial mortgage-backed securities and commercial real estate collateralized loan obligations have not benefited from direct support. Read the letter here.

Recent Fed actions:
–Dropped Fed Funds rate to zero
–Dropped bank reserve requirements
–Loosened bank liquidity constraints
–Increased purchases of Treasuries and mortgage-backed securities (including Agency multifamily mortgage-backed securities)
–Instituted a Commercial Paper Facility
–Instituted a Primary Dealer Credit Facility
–Instituted a Money Market Liquidity Facility
–Instituted TALF 2.0 to provide loans backed by certain asset-backed securities

Woodwell set the stage for member conversation outlining economic, market and commercial real estate finance perspective. Additional information is available here. He noted 3.3 million people filed for unemployment benefits last week. For comparison, two weeks ago fewer than 300,000 people filed for unemployment. During the Great Financial Crisis, the weekly claims peaked at just below 700,000. To put that in perspective, 159 million people were employed in the U.S. in February, so 2 percent of that group filed for unemployment claims last week alone.

“Similar to volatile equity and treasury markets, credit spreads for CMBS and other assets have been highly stressed leading to some margin calls and forced selling of assets, which has exacerbated price declines for some assets and market illiquidity,” Woodwell said. “The last couple of days, in line with some improvement in equity markets, we’ve seen AAA CMBS spreads tightening somewhat with lower-rated bonds remaining wide.”

Looking at CRE finance markets, Woodwell said the tone is shifting from how the downturn will affect new business to how it will affect existing properties. “Looking across all property types, a recent survey by the Pension Real Estate Association shows uncertainty beginning to work into the gears of the commercial real estate investment process,” he said. “There is growing uncertainty about how to value properties, driven both by how property incomes and expenses may be affected as well as how investors should value those incomes. That uncertainty is leading many firms (75 percent of those surveyed) to pause plans to deploy capital.”

Flood then moderated a panel conversation with MBA members about how they are approaching another historic week for markets and the global economy.

The key takeaways from that conversation:
–While some capital sources continue to close loans in their pipeline, the ability to underwrite new transactions is a challenge with conservative terms and selectivity being drivers of the ability to execute. The details and implications of the legislative and central bank stabilization efforts are front and center for their ability to create liquidity and address current economic challenges. Syndications have become challenging and portfolio management is capturing an increasing amount of attention.

–Lenders are busy dealing with portfolio ramifications of businesses shutting down and people needing to stay home. Whether through in-house portfolio management staff or master servicers for agency and private-label securitization mortgage loans, the number of relief requests coming in over the past several weeks to a workforce newly adjusting to work from home conditions is enormous and historic. It is a trying time for servicing community; however, it benefits from post-2008 crisis lessons learned.

–While there are a number of forbearance requests and other activities anticipated or in process, special servicers–albeit with reduced staffs declined along with lower special servicing volumes–remain well positioned to handle their roles and responsibilities given the experience of their operations and senior management as well as the depth of their existing lending operations. In particular, there are stronger relationships among different servicing parties interacting on loan portfolios including more frequent discussions on collateral developments and improved transparency.

–The borrower experience as well as everyone’s health and safety are primary concerns for the lending community. Servicers are sensitive to this unprecedented situation, which is not localized but occurring across different markets. They note effective communication is important to overcoming some inevitable challenges. Handling requests and forbearance will inevitably be a different process and program depending on capital source.

–The need for staying at home and social distancing makes some day-to-day loan and asset management tasks difficult if not impossible to perform. The ability to work through these tasks for items such as property inspections and appraisals may require creativity and ingenuity. How parties accomplish these tasks or are unable to do so is evolving and must be looked at on a case-by-case basis with people’s health and safety prioritized.

MBA will continue to facilitate conversation and share relevant information and research as events unfold. The association is active on the policy front as well as actively communicating with members to ensure we are providing strong intelligence and advocacy for the real estate finance industry in uncertain times.

MBA will host another webinar on Friday, April 10th to discuss the CARES Act stimulus package and its implications for MBA’s CREF members.

For more information contact MBA Associate Vice President Andrew Foster at 202-557-2740.