HOW BAD IS IT … ?

 

 

Today’s post is written by Michael Green, Commercial Loan Originator for Counsel Mortgage Group, LLC.

Commercial real estate (CRE) and multifamily loan originations fell almost 48% year-over-year in the second quarter, and 31% vs. Q1-20, the result of a pandemic-related temporary freeze in lending and transaction markets between mid-March through early April, according to the Mortgage Bankers Assn (MBA) quarterly survey. (How “temporary” is it?)

Liquidity returned to the market later in the quarter, and multifamily-agency and certain industrial deals “were bright spots” during the three-month period (Q2), per the CBRE Lending Momentum Index. Other sectors suffered, however, as lenders grew more selective in their deal and property-type financing choices.

“While we have seen a steady improvement in the number of loan applications over the past five weeks, we anticipate that commercial mortgage markets will remain muted over the near-term, especially for retail and hospitality properties, as well as value-added deals which face the greatest underwriting challenges,” per Brian Stoffers, head of debt and structured finance for capital markets at CBRE.

The overall commercial mortgage-backed security (CMBS) delinquency rate rose to just under 6.4% in June, up from 1.2% in March (About a 430% increase ladies and gentlemen.) June delinquencies reached 22.8% in the hotel sector and 17.7% among retail outlets.

Banks were the source of more than 70% of loan originations in Q2, a lending share that has more than doubled from recent averages. Much of that growth was driven by regional banks, according to a CBRE report.

Life insurance companies had the second largest share of loan originations with 23%, down slightly from the second quarter in 2019. Most loans in this sector were conservative with loan-to-value ratios of 60% or less.

CMBS conduit lenders struggled to rebuild deal pipelines following the market disruption and the sharp rise in spreads during March and April. Additionally, loan underwriting remains challenging. Industry-wide CMBS issuance was close to $30 billion in H1 2020, the slowest pace since 2016.”

Alternative lenders, including debt funds, mortgage real estate investment trusts and finance companies, sourced few loans in the second quarter with some of those lenders struggling with liquidity issues, according to the report.

Across all sources, the average loan-to-value ratio fell, while the average debt service coverage ratio and debt yield rose – raising the bar!

The changes in loan underwriting measures reflected the underlying property type composition. While both multifamily and commercial underwriting were more conservative, the overall results were skewed by a higher proportion of multifamily loans which tend to be underwritten slightly more aggressively than commercial ones.

Meanwhile at Counsel Mortgage, we’re anticipating closing a gas station acquisition loan in New Orleans in the next week or two for $1.3mm underwritten at 5.5%. The lender is out-of-state. (A short delay was caused by a couple of hurricanes!)

And we’re looking for a term sheet any day for the ground-up construction of a gas station/c-store and carwash in Arizona. The $5.6mm project is expected to be underwritten for about a $4.5mm loan, or 80% LTV, requiring about $1.1mm equity-in from the borrower/sponsor. The construction loan will automatically roll to a permanent loan upon completion of construction. The borrower is an out-of-state multiple-store operator who is relocating to AZ. We’re pleased to have been able to facilitate site selection, represent the borrower with city officials for PAD uses, and counsel the borrower in the selection of the architect, contractors and lender. (Michael Green is also a commercial real estate broker and represented the borrower in the acquisition of the land.) Much of the development process has already been done. Once the term sheet is approved, we expect to clear underwriting in 3-4 months (even with COVID, and the national election on the way). We enjoy previous relationships with the team members selected. Effective communication within the group is essential to meeting time and budgetary targets for a successful project. Ground breaking is expected be in Q1-21 with a construction timeline of 4-6 months. Our unspoken and uncontracted commitment to our client is to stay engaged in the process through receipt of the Certificate of Occupancy.

Many of you reading this will recognize gas stations as a particularly difficult sub-segment of retail to finance at any time. In our particular environment, some would say impossible. How much more difficult is your project?

If you think we might help you with your development, acquisition, or refinancing project, give us a call at the Counsel Mortgage Group.

We offer a variety of products and services, ask us how we can assist you today:
Counsel Mortgage Group®, LLC
www.counselmortgage.com
480-502-1000
NMLS #178927
AZ MB #0909580
CA DBO #60DBO43873

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