Lending activity was healthy to start the year. Then COVID hit, and lenders paused to assess the impact of the pandemic.
Things could be picking up soon, though. In its recent Capital Alert, Marcus & Millichap says, “recent conversations with institutions and investors across the lending landscape suggest dynamics are shifting quickly.”
M&M expects deal activity to accelerate in Q4 as lenders shift priorities to reflect evolving opportunities and risks.
Asian and European groups looking to invest in open-ended US funds will fuel some of that growth. Bank and insurance companies are drawn to commercial mortgage loans where they can get yields of 2.5% to 3%.
Investment banks, for their part, are gravitating to fixed-rate construction loans, which could help them lock in low-leverage deals, according to M&M.
“These banks are willing to take the construction risk in exchange for a yield that is 50- to 75-basis points higher than the permanent loan,” according to M&M. “Some investment banks are doing light transitional loans with a solid risk-adjusted return, while others are considering the preferred equity space.”
For multinational banks, payment relief and covenant kickouts on non-essential retail and hotel properties have become a larger priority throughout the pandemic. The big banks that are offering bridge loans, term loans and construction financing for their balance sheets are focused on helping current clients with strategically important transactions in tier one gateway markets and select secondary markets, according to M&M.
Institutions seem to prefer multifamily, built-to-suit industrial and some pre-leased office. As some of these institutional investors leave the market, high-net worth and family investors are moving in, according to M&M.
CMBS lenders see COVID-19 as a temporary issue but are avoiding mom-and-pop restaurants, movie theaters, gyms and hotel tenants. Not surprisingly, these lenders prioritize logistics, self-storage and essential retail, such as grocery and drug stores. They are doing more acquisitions and less cash-out refinancings, according to M&M.
Credit unions are migrating from Class B neighborhood retail and grocery-anchored centers to multifamily, mobile home, self-storage, medical and multi-tenant industrial properties. They also are interested in some single-tenant industrial. They’re looking at guarantors’ liquidity, net worth and the rest of their real estate portfolios as they evaluate deals.
Typically, credit unions target a 4.5-percent return for a standard fixed-rate loan with a five-year term. Their loan-to-values are generally more conservative but can hit 70 percent, depending on the deal and borrower, according to M&M.