As we respond to the effects of the COVID-19 pandemic, we will experience several events that will continue to stress commercial real estate and credit markets. The International Monetary Fund has reported that we entered a recession “as bad as or worse than in 2009.” However, a projected recovery in 2021 is expected if we can contain the virus. To support and cushion the impact on the markets, the G20 recently committed over $7 trillion, or more than 6% of global GDP.
In the US and the EU, there are concurrent declines in valuations in both the retail and hotel industries. Some properties have lost as much as 50% of their value. We will likely see many companies defaulting on loans or restructuring funds to free up capital.
To help address the US crisis, the Fed restarted the Term Asset-Backed Securities Loan Facility (TALF) program. In March 2020 the Fed provided $100 billion in loans on a non-recourse basis, with a maturity of three years. Subsequently, there has been a surge to secure these loans across markets, as many see the opportunities in credit funds and TALF.
There has been a flurry of activity toward alternative sources of debt capital in response to tighter bank lending conditions. Foreign lenders and funds (private equity, pensions, SWFs, insurance companies) have been increasing their exposure to real estate in countries such as China, Australia, India, Vietnam and Indonesia. Investors across the globe are using debt to access nonperforming assets and distressed projects.
While the initial debt financing came in the form of mezzanine loans or development finance, junior notes and other subordinated instruments are likely to become more popular. Refinancing existing commercial real estate loans are also expected to pick up.
Sector by sector investor demand is driving debt and private credit funds to call capital rapidly. In contrast, COVID-19 threats continue to deflate the retail and office sectors. The senior housing sector is challenged as General Partners hoard cash to address any outbreaks that might occur in a residential space such as assisted living or nursing homes.
The COVID-19 crisis has upended the global commercial real estate markets. While there is stress in the markets today, the primary drivers of change to these markets will largely remain, as outlined in our latest whitepaper. You can explore this topic further in our whitepaper: Trends Reshaping the Real Estate Investment Landscape.
Alternative Investments, Commercial Lending, Real Estate & Property Management