COVID-19 Investor Update
As we continue to grapple with the current health and economic crisis caused by COVID-19, we are beginning to be able to gain clarity on the economic impact caused by the crisis, and its implications over the long term for real estate investors.
Photo: CDC/ Alissa Eckert, MS; Dan Higgins, MAMS
Although the situation appears to have deteriorated over the last few weeks, there is continued optimism over the long term for 2020. The shelter in place orders being made across the country, coupled with more aggressive testing measures will hopefully stem the rash of new cases and we can begin to contain the virus as other countries have done. Capital market lenders are expecting to see a material bounce back as early as June 1st, based on comments from Treasury Secretary, Steve Mnuchin regarding the efficacy of containment measures. Institutional banking is also bullish on the recovery period, with some experts predicting a faster bounce back than 9/11 or 2008 and continued growth through 2021.
In response to the virus, we have also seen an unprecedented fiscal stimulus from the US Government. By current estimates, the government will have pledged over $4T in support to aid economic recovery. To put that in perspective, that's over 20% of the US GDP. $350B of that support has been pledged to small business owners to help cover rent, utility and interest payments. We are also expecting Fannie and Freddie to be coming out with forbearance announcements to help aid the recovery. The research I've done indicates that homeowners will be able to forego 3 months of loan payments, and will be required to pay them back over the following 12 months. I expect that commercial lending will follow suit, but due to complexities in the loan structures it may take longer to put a blanket forbearance program in place. During the interim the SBA has already freed up money for landlords who are affected by loss of rents in the form of a 'disaster relief' loan (https://www.sba.gov/disaster-assistance/coronavirus-covid-19).
What is becoming clear is that debt markets are having a major issue with liquidity. As a result, many lenders are hitting the pause button until the market returns to some degree of stability. That issue will remain unresolved until they can gain a better understanding of how long this will last. In the interim, we expect to see more stringent underwriting, and an increased focus on the experience of operators. Where this effect will be felt locally is on any 'forward looking' value add opportunities in our local markets, since the stabilization period and underwriting of post renovation rents will be viewed with scrutiny by lenders.
Expect to see more listings put on hold or kept off market until some stability returns to our local markets. Closing sale transactions will be financed primarily with cash or private capital. The deals we will see close are from the people who are locked in with low rates on their current loans. The first listings we see coming to market will typically mean the seller has a liquidity issue.
For those of you who are waiting to buy, expect to see a renewed focus on your equity and ability to gain financing when making offers. There will be a renewed focus on due diligence that will allow you to mitigate any risks you are assuming.
CBRE conducted a survey of lending professionals who felt that last week was the low point in the liquidity crisis and we can expect to see the Federal Government working to support the capital markets to prevent capital from freezing up - as guardrails are put in place to support our economy we will hopefully see additional opportunities for investors and come back better than ever.
We'll make sure to continue offering more information as it becomes available. Please, do not hesitate to reach out if you have any questions!