2020 CMBA Western States CREF Conference Takeaways

September 10, 2020

The following are Slatt Capital‘s primary takeaways from this week’s virtual California Mortgage Bankers Association Western States Commercial Real Estate Finance (CREF) conference.

Take-aways from the Mortgage Bankers Association virtual portal conference on September 9th-10th:

  • As a result of COVID-19, the immediate future of the commercial real estate market remains uncertain
  • In the midst of the current recession, investment activity is down by 68% nationwide
  • Retail, hospitality, student housing, and office properties have been hit the hardest
  • As rents continue to fall, short-term lease renewals are becoming increasingly common
  • Negative absorption is on the rise
  • In the past, value-added properties were appealing to lenders, but now, the future is unpredictable and each origination has become deal-specific
  • Properties in tertiary markets, coupled with early rollover are the most challenging
  • Lower leverage is the new norm – capped at 60%-65% LTV on most property types


The Future of the Office Market:

  • Activity has decreased substantially
  • There is a 13.1% office vacancy nationwide
  • Expect to see a considerable amount of tenant workouts
  • Many tenants will not return to their offices until Q1 or Q2 of 2021
  • Once tenants return, the new norm will be to work from home 1-2 days each week


The Future of Retail, as we Once Knew it:

  • Over time the retail sector will bounce back, although it will look different.
  • The Amazon store with the elimination of sales clerks will become the gold standard of retail
  • “Ghost Kitchens” will be designated to patrons, in which there is not a retail storefront. Food will be prepared from a warehouse, increasing profitability
  • Urgent Care facilities and grocery stores will become complementary tenants
  • Retailers with an online presence are more likely to survive
  • What isn’t working is daily shopping, in which people need to stand 6 feet away from each other
  • The future of movie theatres is uncertain, especially with the advent of Netflix and other networks
  • Developers will need to avoid placing tenants with overlapping services such as COSTCO, Walmart, and Grocery Stores in close proximity to each other
  • “Last mile” distribution centers are being designed so that the consumer can pick up products from a separate warehouse location
  • Smaller tenants who cannot open their doors for business due to COVID may struggle
  • Many stores are morphing into the grocery business such as 7-11 & Dollar General
  • Outdoor dining will become the new norm


What’s Happening in the World of Government Sponsored Enterprises (GSE)

  • While other lenders are waiting on the sidelines, Fannie Mae & Freddie Mac have remained active
  • Rates are at all-time lows
  • HUD loans are in the 2.00% range fixed for 35-40 forty years
  • Multi-family properties remain unphased
  • Analysts are predicting a 6% decline in rent, which probably will not get back to pre-COVID rents until 2022
  • Acquisitions are getting done in the 65% LTV range, or higher
  • The future of student housing seems promising, even though most of the learning is virtual. We will have a clearer perspective on student housing within the next 45 days or so.


Borrower and Lender Experiences with COVID-19. Where do we go From Here?

  • Lender forbearance pertaining to hotels and retail properties are more prevalent, compared to office, industrial, and multi-family
  • As life companies and banks are pro-active in accommodating borrower’s, CMBS lenders have been the least flexible when it comes to forbearance
  • Toward the end of 2007, lenders became aware that a recession was on the horizon. Concurrently, up until mid-March, it was business as usual in the banking industry. Shortly thereafter, the pandemic came on full force, and consequently, lenders were inundated with forbearance requests.
  • As vacancies increase, what was once a 65% loan request, will evolve into an 80% loan request. Consequently, when the loan matures and the borrower needs to refinance, lenders will be asking the borrower to come out of pocket, in order to cover the shortfall.
  • As challenges occur, the role of the mortgage banker will be instrumental


Market Overview – The Glass is Half Full:

  • Once a vaccine is implemented, the economy is expected to bounce back
  • Most lenders are placing debt on industrial, multi-family, and office properties
  • Grocery store sales are up 30%-40% since COVID-19
  • Domestic and international money remains available
  • While the pandemic has affected many businesses, it has also brought on the triumph of technology
  • Although it seems evident that many tenants will not be able to weather the storm, those businesses with an online presence will continue to stay afloat
  • Although retail, office, and hospitality sectors have struggled, industrial and multi-family properties continue to thrive
  • Apartments are expected to be in demand in spite of declining rents
  • As e-commerce stores continue to thrive, retail businesses will remain essential
  • The majority of tenants continue to pay rent, including those who are working from home
  • The senior housing market looks bright, despite the terrible outcome due to the pandemic
  • As interest rates remain at an all-time low, the housing market has surged
  • The Feds are NOT committed to increasing rates, even if inflation rises
  • The CMBS market has recovered dramatically since March
  • CMBS rates are in the mid 3.00% range. This is close to where they were pre COVID.
  • Retail will survive, although it will look different. A new process will begin to take place
  • Partnership across the board with the city, developers, and lenders will begin to take place
  • Once the recalibration has occurred, we will begin to see the light at the end of the tunnel

Jeff Glenn
Senior Vice President
D: 916.565.7487
Connect with Jeff on LinkedIn Here