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

Capital markets remain healthy with a wide array of active lenders. As the nation progresses through the final months of the year, the lending landscape has vastly improved from the onset of the pandemic which brought lenders and investors to pause as they assessed the impact of COVID.  Access to debt capital, though, has been far more abundant than during the global financial crisis (2008-2009), with the Fed taking extreme steps to shore up credit markets and ensure liquidity. Following the Q2-20 uncertainty-driven investment slowdown, buyer-borrowers have become increasingly active with more lenders in the market. While CRE sales activity remains well below activity from a year ago, transaction velocity has climbed about 25% from the Q2-20 to Q3-20.

Lenders have adjusted strategies for a post-pandemic environment. Underwriting criteria has become more conservative (raised the bar) with many lenders facing substantial headwinds, resulting in fewer options for some borrowers. While liquidity has remained plentiful, LTV ratios have contracted as the health crisis has unfolded, now resting in the 50 to 70% range, dependent on the deal and borrower.  Debt service coverage ratios have also shifted, rising to the 1.6 percent to 1.9 percent range. In many cases, more weight will be placed on the strength and experience of the borrower than the asset itself.


“Alternative” lenders have narrowed financing gaps left by big banks – a similar market dynamic that emerged in the previous financial recovery of 2009-2012. Government agencies were aggressive originators in recent quarters to account for a much larger share of lending activity. Debt service reserves are now often required for multifamily mortgages and most underwriting assumes no rent growth for a couple years. Community and regional banks have stepped up to close the lending gap as well, financing debt across most property types. Debt funds are also working to fill the void left by larger banks and CMBS lenders, focusing on the more challenged CRE sectors including retail and hospitality. Yield-hungry investors are returning to the market, seeking to lock in low rates in a haven from geopolitical risks and the greater volatility of other asset classes (income-type investments), helping to support sales activity in Q4.


The retail sector is facing greater fragmentation. Many lenders, however, are still working with borrowers, to provide payment relief for troubled assets, limiting foreclosures and greater price fluctuations. Lenders are eager to invest in multifamily and industrial assets shifting their focus to more pandemic-resilient investments. Apartments and industrial properties have been able to draw greater interest with banks and non-agency lenders remaining active originators, most often funding 5-7 year loans with rates in the upper-2 to mid-3% range. Evolving e-commerce trends, challenges in the single-family home market and limited capital expenditure requirements have helped to ensure financing remains available at favorable terms for both asset classes. The agencies have a combined multifamily lending cap of $140 billion in 2021, with at least 50% of originations dedicated to affordable housing. Most lenders have been more selective when assessing office properties in spite of strong rent collections, favoring suburban office deals while requiring LTVs closer to 50% for buildings in larger downtown markets.


Record-low interest rates have encouraged investment activity. Freddie Mac and Fannie Mae are originating loans in the upper-2 to low-3% range for gateway and secondary markets, while interest rates in smaller markets can reach the mid-3 percent territory for well-capitalized buyers. Most banks, credit unions and CMBS lenders are offering debt in the 3.25 to 4.25% range, and debt funds start slightly higher in the 3.5 to 4% territory.


The Federal Reserve’s commitment to keep the federal funds rate near zero through at least 2023 should hold interest rates near historical lows over the coming quarters, providing CRE investors with compelling risk-adjusted returns, particularly if leveraged, in contrast with other asset classes (stocks & bonds).


For feasibility discussions and proforma assistance, contact us at the Counsel Mortgage Group.


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