Finding Capital Sources During the COVID-19 Pandemic; Diversity is Key.

June 30, 2020

Finding Capital Sources During the COVID-19 Pandemic; Diversity is Key.

June 30, 2020

At the start of the year, the CRE markets were abundant with capital from every source. With the onset of COVID-19, we saw a very quick pull back of capital sources in all sectors and a pause as the market tried to get an understanding of what was happening. The Fed moved quickly to support the real estate markets, which drove confidence and provided the continued availability of capital to the commercial mortgage markets for multifamily. As a result, we are seeing strong opportunities in all forms of multifamily and housing. Renters continue to desire safe, stable, well-maintained housing; therefore the multifamily market has been the least-affected commercial property category through the crisis and we believe will continue to be.

Who is Placing Capital Sources Now?

While the economic landscape and the commercial real estate market itself looks different than it did at the start of the year, the pool of capital providers remains largely unchanged. However, while capital sources remain the same, what has changed with the economic shutdowns as a result of COVID-19 are lenders’ respective appetites and levels of engagement in the market. The agencies, with multifamily’s stability and the government’s continued support, have been very active. Other commercial lenders with broader funding mandates, like Life Companies and Banks, are also actively looking for opportunities. However, engagement and interest in funding varies between the different commercial property types as each has been affected differently by the economic shutdowns.

Life Companies are generally conservative and reliable; they are always in the market through thick and thin. They have the luxury of being selective, and they’ve taken time in this pandemic to assess their portfolios to better understand any potential challenges. With initial assessments behind them and less volatility as the economy opens back up, Life Companies are starting to re-enter the market with pricing at pre-COVID levels.

Banks have also been looking for ways to participate in the market particularly as they have seen a boost from payroll protection loans. Historically, banks have primarily been in construction loan business, but with less construction going on, they are looking for new channels to create interest revenue. Term loans present a new way to participate in the market while they wait for the need for construction loans to return to the market.

Where is Capital Heading?

One of the most interesting multifamily stories of this pandemic thus far is the strength rent collection has demonstrated in these early months. While there was talk of rent payments taking a dramatic hit, it has held up strongly so far, making multifamily more attractive to investors. As a result, we’re seeing capital flow to permanent loans for refinances of quality properties with strong cash flows and ability to prove that they can maintain high occupancy.

Personally, my team continues to fund a large amount of business for the manufactured housing, industrial, storage, and multifamily sectors. In fact, the Manufactured Housing sector has been able to weather the COVID storm with almost no requests for loan forbearance. All areas and transactions are open for originations from institutional lenders who are looking for very strong sponsors and good-quality real estate.

The Evolving Role of the Intermediary

We’ve always considered ourselves a strategic advisor first, and that priority has only strengthened. In the current environment, our clients are demanding the most current capital market knowledge, and we are actually providing this resource for both our clients and the lenders we work with. In this unique time the commoditization of capital has diminished as reliability of funding has become a priority in the marketplace.

As traditional capital sources remain cautious and lenders start to diversify their engagement in the market, our role of matching clients with the right capital source is essential. We’re putting our relationships with a broad spectrum of capital providers to work on behalf of clients and continuing to embrace an agnostic approach to execution, which makes us better equipped to consider and provide different capital options that best align with our clients’ long-term goals.

At present in the housing market, good sponsors are finding capital and plenty of it as those who have been on sidelines start to re-enter the market. To me, it feels like the housing market is stabilizing to even improving. Of course, we don’t know what’s around the next corner, but there is reason to remain optimistic. As we hopefully continue to head down this path, it remains more important than ever to serve as a creative, strategic capital advisor to our clients.

By Charlie Williams, Senior Managing Director