Today’s post is written by Michael Green, Commercial Loan Originator for Counsel Mortgage Group, LLC.
The repeat CRE sales of $39.1 billion for the first 5 months of 2020 fell 24.2% from the same time a year earlier, according to the latest monthly CoStar Commercial Repeat Sale Indices.
This is the first look at the year’s commercial real estate pricing trends, calculated by using the price change from the pair of first and second sales of properties sold multiple times. The indices are based on 538 repeat sales in May and more than 227,324 since 1996.
Volume held up generally well vs. the prior year for the first 3 months of 2020, but dropped precipitously in April and May reflecting overall caution among investors as well as physical challenges in transacting deals in a lockdown. The shrinkage in deal volume was felt across the size and building-quality spectrum.
Whether you’re an investor with a now-underperforming property due to tenant late pays (or none at all), or an owner-occupant suffering from lost sales, there’s a need among CRE owners for liquidity, and/or increased cash flow. There’s a reluctance to sell properties due to the unknown level of pricing – yes eroded, but how bad?
Do you really want to apply for the next Government lifeline? Talk about dancing with the devil!
The case for refinancing, and why it’s the hot topic in CRE.
With historically low rates there’s significant value in the ability to convert loans to full term or partial interest-only at this time. For some owners and operators, better net cash flow after debt service is a priority, and for some, return of equity from debt refinance (cash out) is valuable. With a long-term hold strategy, refinancing helps hold onto great assets at a low cost of debt. Further, refinancing generates a tax-free cash flow distribution to the borrower (We don’t give tax advice – check with your accountant on this.) With cash out, excess proceeds from refinancing can be reinvested in any asset class over any time period without being subject to the pressure of 1031 exchange time frames or Opportunity Zone criteria.
Most often, lenders are paying close attention to including reserve holdbacks for debt service, operating expenses, or taxes and insurance at closing. They are structuring these reserve escrows to cover between 6-12 months, unless the transaction is low leverage. Lenders are also stressing the need to understand the real estate owned schedule, and if owners are experiencing any distress from other assets.
There is considerable liquidity in long term fixed rate debt for stabilized product, like multifamily or industrial. Office, on the other hand, is seeing more debt availability for stronger markets, multi-tenant, national vs. local tenants, and safe building operation protocols to combat COVID. Other product types (hotel, retail, land, etc.) have proven to be more difficult.
Deals that had been finding a home with marginal sponsors, transactions with rent assumptions leading the market (“Blue Sky” projections), or containing aggressive lease-up time frames, are not currently getting done. Those remaining in the market have been making loans “selectively” based on prior relationships or disciplined underwriting. Lenders have commented that pricing and leverage are now more in line with perceived risk of the business plan and asset. Leverage has reduced 5%-10% and pricing has expanded 0.50%-1.50%.
In today’s environment there are no easy choices … only hard choices, and harder choices. You might find that having an ally, a confidant, a counselor is a good, if not necessary, member to have on your team.
If you think we might help, give us a call at Counsel Mortgage.
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