Commercial Real Estate Capital Markets Amidst Spreading COVID Variants

As we enter the last quarter of 2021, some commercial real estate fundamentals continue to improve. Despite new COVID-19 variants wreaking havoc, much of the economy has re-opened and both the industry and consumers at-large have learned to adjust to a new, quasi-normal way of living and working. Some travel has resumed, however the sector continues to be impacted by inconsistencies across regional and international quarantine and vaccine mandates. Traffic at restaurant, retail and entertainment venues is proving steady, and some employers are bringing people back into the office, even if just some of the workforce for part of the time. These factors have partially improved commercial real estate dynamics, however the Delta virus variant is rapidly gaining ground across the country and it, along with additional variants, is acting as a commercial real estate recovery wild card.

Obviously, not all is rosy. Capital markets reflect positive improvements along with distress. After a considerable period of dealing with the pandemic, lenders are more comfortable financing the asset classes initially most impacted by COVID-19, with increasing interest in office and retail transactions. However, lending activity is measured and could change at any time if new variants reverse economic progress.

Finance activity for hotels is increasing at a much slower pace and, despite some debt availability, fixed rate loans are off the table. Borrowers have little desire to lock themselves into 10-year loans with lower proceeds. Floating rate, shorter duration loans are common today and, ultimately, this sector has a long road to recovery.

Conduit lending is slowly climbing with strong demand for bonds giving lenders some confidence to transact. Spreads are tightening and COVID reserves have relaxed. Yet many debt providers face volume challenges. What may help volumes spike over the coming months are the caps put in place by Freddie Mac and Fannie Mae, as the agencies compete with the conduits. Caps could lead borrowers to turn to conduits to source debt.

Additional agency activity, including relaxed COVID reserves is noteworthy. With new leadership at the helm of the FHFA, the effort to remove the agencies from conservatorship has stopped for now. It’s likely we will see the agencies focus on the country’s supply of affordable housing stock, a positive sign for multifamily finance activity.

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