Lending Activity Ticks Up, But Will it Last?

Approximately four months after the COVID-19 pandemic disrupted the US economy, capital markets have stabilized into a new normal, according to a report from brokerage Marcus & Millichap.

Lending activity is slowly increasing, the report said, with capital flowing to borrowers with established track records, cash in the bank and “high-quality assets with secure cash flows.”

“We see more and more lenders edging back in, although no one would call it a borrowers’ market,” the report concluded.

The easing market is attracting borrowers looking at refinancing while interest rates hover near historic lows. In July, Marcus & Millichap Capital Corp. reported closing more than a half-billion dollars in commercial real estate loans with 79 lenders. The strict underwriting terms that characterized the market over the last three months is loosening somewhat.

Whether the increasingly favorable lending options continue to be available in the short term is unclear.

“Infection rates are ticking up, lockdowns are being renewed, and the US is struggling through the sharpest economic contraction since World War II,” the report said. While July employment numbers were better than expected, 12 million Americans lost their jobs since the pandemic ignited and more than half of U.S. households reported a loss of income, according to a Census Bureau survey.

Also, local governments have projected revenue losses of $360 billion between 2020 and 2022, and Congress and the White House remain deadlocked over what should be included in any new aid package.

Still, the report notes a “selective” rise in lending activity across outlets, including debt funds, life companies and commercial mortgage-backed securities with more short-term bridge lending becoming available.

“While the expectation of debt service reserves is becoming more common by borrowers, many lenders have begun to reduce the scope and terms of that contingency,” the report said. “Finding non-recourse capital across asset classes and lenders (other than agency and the resurgent CMBS) is proving challenging.”

Fannie Mae and Freddie Mac are backing up the market with rates ranging between 2.5 percent to 3.5 percent. Picky lenders are favoring single-tenant essential retail spaces, high-quality industrial sites and self-storage properties.

Multi-family properties “have proven more resilient than initially expected,” and there’s hope in the industry that President Trump’s Aug. 8 executive order providing an extra $300 a week in unemployment payments will help that trend continue, the report said.

“Given rock-bottom interest rates, commercial real estate will continue to be an attractive long-term investment,” the report concluded.