The Coronavirus-inspired stock market turbulence is making it harder to price commercial real estate deals, according to Matt Ruark, head of commercial and healthcare mortgage production for KeyBank Real Estate Capital.
Last week, Ruark was taking daily calls about pricing as the stock market fell.
“There is a lack of clarity as to the severity and what’s going on with the Coronavirus and what it means to the economy,” Ruark says. “You’ve seen the 10-year Treasury have a dramatic drop in the last week. You’ve seen spreads that are blowing out.”
From Feb. 19 to Feb. 27, 10-Year Treasury rates fell from 1.57% to 1.29%. On Feb. 27, 2017, they were at 2.68%. Ten-year swaps fell from 1.51% on Feb. 19 to 1.27% on Feb. 27. On Feb. 27, 2017, they were at 2.69%.
With this turbulence, Ruark says sponsors will struggle because the spreads they were quoted two weeks ago are no longer applicable in this new environment.
“You’re really thinking more about all-in rates versus a treasury index in a spread because there are certain yields that buyers of paper or loans are looking for,” Ruark says. “They just can’t go below certain rates. So, your spread may have gone from 150 to 200 to 250 just because a capital source isn’t going to go below 3% or 3.50%.
The situation is “creating some real inefficiencies and anxiety in the marketplace,” according to Ruark. “The drop in treasuries has got a lot of people’s attention,” he says.
Ruark says there needs to be “calibration” between buyers, borrowers and investors. “We don’t know how long this is going to last,” Ruark says. “I think you see people holding their floor rates in. Nobody has shut the doors yet, but if they’re going to make a loan or put a quote out, they’re wanting to make sure that it’s the right deal and the right sponsor at a yield that makes sense if they’re going to hold it or if they’re going to lay it off to another capital source.”
For the time being, Ruark thinks transactions will continue to occur, but not at the pace they were a few weeks ago. “We’re open for business,” he says. “We’re monitoring certain floor rates and target yields that people are trying to maintain.”
Before the turbulence of last week, most of the coronavirus cases were occurring in China. Brian Stoffers, Global President of Debt Structured Finance for Capital Markets at CBRE, says his firm had reduced travel in its Asian operations.
“The Chinese capital [coming into the U.S.] had largely frozen up anyway, so we do not see much of an impact there,” he said a couple of weeks ago.
Markets that Chinese capital had been flowing into other cities, such as London, have seen slowing, according to Stoffers.
“That might be opening up an opportunity for people in the Middle East or Germany to invest more there,” Stoffers said two weeks ago. “But, there’s a bit of a slowdown from the Asian investors.”
As the Coronavirus cases increase, there could potentially be a pullback from investors all around the globe.