Coronavirus chaos driving lenders to safer projects amid low interest rates
The focus has shifted to stable commercial properties that look like sure things
UPDATED, 5:26 p.m. March 13: Maddd Equities and Joy Construction recently landed a $45 million refinancing for their luxury rental building in Hudson Yards. While the debt package for 445 West 35th Street may look like a standard deal at a standard project, the interest rate, at 2.59 percent, is anything but standard.
“When things started to get volatile, I brought in a swap adviser, Kensington Capital Advisors,” said Joy Construction’s Eli Weiss. “The swap was the key part to the deal.” Weiss worked with Bank Leumi and Stifel Bank to get the deal done.
The loan package is emblematic of what real estate lenders are looking for amid the chaos the coronavirus pandemic has already wrought on financial markets across the globe. They want their money in safe, stable projects, and are willing to accept low interest rates as part of the deal, industry players and experts said.
Case in point: Maddd and Joy are both well-established New York real estate companies, and there is little risk in putting money into a Hudson Yards luxury rental building.
“For those types of deals, the liquidity has remained strong or, if anything, gotten stronger as money has flowed toward safety,” said Scott Singer, president of Singer & Bassuk Organization, a real estate finance firm. “We’re seeing that play out in a willingness among lenders to quote, rate lock and close on transactions that they consider to be safe and strong.”
In a statement, Bank Leumi National Head of Real Estate Christopher Gregg said the firm continues “to evaluate every potential financing opportunity on its merits, regardless of where the interest rate might land.” He said he expects the market to improve “once the coronavirus is better contained and its effects better mitigated.”
The lending market in general is still open for business, with multiple sources saying that activity itself has not slowed down very much and Singer noting that certain areas have even seen an increase.
Rich Horowitz, principal at the real estate financing firm Cooper Horowitz, echoed that sentiment, saying he already has a fee mortgage and a construction loan due to close next week.
“Not one lender has told us they’re out of the market,” he said, offering one caveat: “I don’t know if you can get a property financed in New Rochelle today.” The Westchester County city had been the epicenter of the coronavirus outbreak in New York.
Now, the focus is moving more and more toward projects that seem like sure things, industry pros said. One banking executive, speaking on background, said money had already been retreating from more unproven developments.
“I think a lot of the speculative lending by the banks has been curtailed,” he said. “Perhaps some of the other nontraditional lenders who have been a little more aggressive, they might find that their portfolios are going to need added attention.”
And interest rates at or less than 3 percent are becoming increasingly normal for loans on those safer projects. This is an extremely low amount, historically speaking, something Singer emphasized by harkening back to the reaction a borrower had to one of the first deals in his career.
“When I called to tell them that the interest rate on the loan, if they were willing to lock that day, was going to be 6.9 percent, they were jumping up and down with glee because they hadn’t done a loan under 7 percent in a decade,” he said. “That was probably late 1995, so it’s all relative.”
Safe haven assets
The real estate advisory firm Ackman Ziff recently received a quote for less than 3 percent on a loan for more than $150 million at a New York City office building that is in the middle of leasing, according to company president Simon Ziff. He said that rates are “holding firm with lower base rates and increased spreads” and that there is an “increased appetite for safe haven assets,” namely industrial, office and multifamily properties, as retail and hospitality properties will likely see a greater impact from the pandemic.
But the lending market has not completely dried up for retail and hospitality assets. Singer said he just received the first ever offer in his career for financing at a 2.5 percent borrowing rate for a development with a significant amount of retail space.
He acknowledged that it could face some short-term damage throughout the coronavirus crisis due to declining foot traffic, but the fundamentals of the project are sound enough to last beyond the pandemic, he said.
“There’s a well-founded belief that, beyond the short term distress, the property will continue to be strong and have value that significantly exceeds the loan,” he said.
Jeff Fastov, senior managing director at Square Mile Capital Management, made a similar point about hotel properties, which are almost certain to struggle going forward as more and more conferences and travel plans get canceled. For now, his company plans to stay away from highly-leveraged projects or projects in unproven neighborhoods, but they are not writing off hotels entirely.
If a hotel has a strong sponsor and a dominant presence in its market, it will likely be able to survive the pandemic, he said.
“The hotels are very concerning, but actually, there may be opportunities if we pick our spots.” He added, “we’re still open to hotels, but we’re going to be super, super selective.”