Problems in the hotel, retail and lodging sectors are pushing the commercial mortgage delinquency rate up.
“November did see small increases in newly delinquent retail, lodging and office loans, but at levels far below what was seen at the outset of the pandemic,” Jamie Woodwell, MBA’s Vice President of Commercial Real Estate Research, said in a statement.
Office property delinquencies rose from 2.0% in October to 2.4% in November. Offices may also see a transition after the pandemic as many workers have become accustomed to working from home. Companies will need to decide if they want their employees working from home, bring them back to the office or execute some variation in between.
While it has been estimated it could take a few years for lodging to return to post-pandemic numbers, their recovery is an economic-led one that probably depends on COVID vaccine availability and real-word effectiveness. Once there are widespread vaccines, people should begin to travel again. In fact, there may be pent-up travel demand – but when?
Then there is the retail sector where brick-and-mortar establishments were facing issues with competition from e-commerce before the pandemic hit. With some exceptions, this sector has more of an uphill climb as it grapples with structural change. Many retailers have declared bankruptcy amid the pandemic, with many re-structuring and returning to market with a smaller store footprint. (What are the exceptions you ask? Please do … ask.)
Multifamily, with 1.6% balances delinquent in November, was unchanged from October. Multifamily has also been struggling as more people fall into unemployment and Congress shows little signs of continuing to offer more stimulus relief or renter support ad infinitum.
Industrial actually experienced a decrease in delinquencies. In November, 2.5% of the balances of property loans were delinquent, down from 2.6% in October, according to MBA. The sector has been boosted by strong e-commerce demand throughout the pandemic. If investors are flocking to this segment, what do you think this is doing to pricing? Right you are!
Redevelopment and repurposing of the hardest hit and slowest to recover (if ever!) properties will represent the value-added opportunities beginning to show in 2021, after the trillions of Government stimuli, subsidies and bail-outs run their course. These will be target shots reflecting the K-shaped recovery widely anticipated in reference to the multi-furcation of intra-industry and geographic footprint opportunities.
But to our point, from where cometh the capital … the financing … the leverage?
From its December FOMC meeting:
… the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.
And for interest rates supporting all this liquidity, the chart below illustrates current Fed thinking of low-to-no (zero) rates through 2023.
So, should we plan on rolling up the truck to the back of the bank and begin shoveling money? No, probably not.
Even with vaccines beginning to roll out, 2021 will be an uncertain year for CRE financing. E-commerce has conventional much of the brick-and-mortar retail under siege. Many offices and hotels are sitting empty.
Across the board all asset classes are suspect now. Lenders are having a hard time finding confidence in the proforma of any deal because of economic and market uncertainties … and markets hate uncertainty!
Conventional lenders, whose rates and cost of capital will remain low, can be expected favor established sponsors (borrowers). But even then they will likely remain disciplined in their underwriting. They will want to confirm that their borrowers have the financial strength and the experience to execute their strategy and have the financial staying power to bridge the valley until economic normalization is achieved.
This hesitancy on the part of conventional lenders opens the door for private lenders to provide bridge and recovery capital. Many private lenders are creating targeted funds in anticipation of lending opportunities. The question is, of course, how to tap them?
For feasibility discussions and capitalization assistance, contact us at the Counsel Mortgage Gp.
Today’s post is written by Michael Green, Commercial Loan Originator for Counsel Mortgage Group, LLC.