This week Public Storage backed out of a $1.2 billion acquisition of an Australian company, National Storage REIT, citing the uncertain market conditions due to the coronavirus. While it may have been one of the largest transactions to fall through because of the pandemic, it is by no means the only one. Commercial real estate participants are hitting the pause buttons on many transactions of all sizes as they assess the current landscape.
“We are definitely in a hiatus,” Colliers International Florida’s Ken Krasnow tells GlobeSt.com.
“A lot of deals are getting put on hold,” Jahn Brodwin, senior managing director of FTI Consulting tells GlobeSt.com. “People are reluctant to sign on the bottom line until they have a sense of the duration.”
Many deal delays are simply due to participants needing more time, Krasnow says. “We are hearing more people requesting extensions, needing more time in due diligence periods because of physical limitations such as difficulty with inspections.” In other cases, people are taking the time to determine how much of a short-term disruption to the market there will be.
“Unlike other crises, where people dropped contracts or didn’t execute leases, we haven’t seen that dramatic of a pullback,” he says.
Buyers are also taking more time to understand the creditworthiness of the tenant base, Brodwin says.
In some cases the dwindling deal flow has been due to lenders becoming more cautious about underwriting. Banks are struggling with valuations right now, Brodwin reports. “With an event like this with such a big unknown to cash flows, it makes it very difficult for banks to come up with proper value.” Many are still underwriting to cash flow and making sure there is enough room to cover the debt services, he says. “The notion is in the longer term things will get back to normal.”
The cash flow question is an issue for buyers as well, of course. Right now it’s a fluid conversation, Krasnow says. “If you are expecting to buy a property based on X, yes there is projecting of cash flow in place and projections of vacancy. The short-term impact is still to be determined.” Many tenants, especially retail ones, will have short-term disruptions and some may not be able to survive, he says. “That is where the federal and state response to fill that gap is critical. That is still a fluid situation.”
Krasnow reports there has been a slowdown in quoting, but at the same time there is a huge amount of private capital looking for opportunities to invest in this market. “Bridge loan or mezz financing providers see an opportunity if a bank or institutional lender is taking a delay to fill the void.”
“Most of this is predicated on the underlying assumptions that this is not a systemic crisis like 2008 but a broad-based one that affects everyone. There will be short-term pain and disruption to the market, but private lenders are saying the underlying fundamentals were very strong two or three week ago.”
Indeed, Walker & Dunlop CEO Willy Walker told listeners on a webinar this week that most lenders are still quoting deals, depending on the asset class.
Multifamily is still active and there is plenty of demand for Freddie Mac and Fannie Mae paper, he said. He expects that the FHFA will raise its caps on the GSEs to keep liquidity flowing.
Lenders are also quoting on industrial deals, he said, while bids on office deals are scarce. “Nobody is touring new properties. “The number of lenders willing to quote on office has fallen.”
Getting anyone to quote on a retail property right now is challenging, he also said and as for hospitality, that is under massive pressure. “No one is quoting on hospitality and we expect defaults to come as debt service starts to take over.”
One piece of advice he offered listeners was not to quibble over terms with lenders right now. “If you have a deal in hand, take it. Don’t ask for more.”