Multifamily Execs On Coronavirus: Keep Calm And Nab Those Low Mortgage Rates
Faisal Ashraf woke up Monday morning ready to work on $200M worth of deals in London hotels when fears about the coronavirus rippled through the world and caused the largest single-day stock market drop since the Great Recession.
Ashraf, who, as founder and CEO of advisory firm Lotus Capital Partners, connects lenders and borrowers, didn't sweat it. The lenders he was working with understood the project had solid fundamentals, he said.
By Monday's close, the S&P 500 had dropped nearly 8% and massive flight to U.S. Treasurys pushed the yield curve below 1%. After a Tuesday rally, markets dropped again Wednesday, lengthening the correction. The bumpy capital markets have given real estate players a heightened sense of uncertainty.
"Certain lenders have decided to pause with regard to hospitality lending until there's more clarity for what it means to the travel and leisure market," Ashraf said. He said he was "concerned" about the next few months but that worries were concentrated on hotels heavily reliant on current cash flow to cover debts. He expected lending for new construction or renovations to proceed steadily.
Ashraf, who previously served as managing director and the head of capital markets at CCRE, still intended to fly this week (with a 72-year-old parent) from New York to Miami, where he will be a panelist at Bisnow's Capital Markets and CRE Finance event March 18. Several panelists said the coronavirus panic is a temporary disruption to markets and suggested that businesses find opportunity in the chaos — specifically, that they take advantage of extremely low mortgage rates.
"It's a good time to get some fixed-rate debt," Weiss Serota Helfman Cole & Bierman Real Estate Chair Joe Fernandez said. "I refinanced my own mortgage. For a multifamily project to get fixed-rate debt for an apartment or hotel, 10-year fixed money, this is a really good time. If you can lock in a rate right now, you're pretty psyched."
Mortgage rates dropped below 3%, the lowest level in nearly 50 years, with 30-year fixed rates down by 112 basis points compared to this time last year. The has led to such a borrowing binge — about double the usual business volume, finance experts said at a recent event — that some mortgage lenders reportedly even hid the new rates from their websites.
Fernandez said that, among his peers in the business community, the coronavirus is generally seen as "causing short-term effect that will eventually blow over." "Even things like 9/11 definitely had a real, deep, severe effect — but fairly short-term," Ferndandez said. "When the world righted itself again, the world got back to normal. And that was much worse than this." He expected public companies would plan for a 30% drop in property-related revenues, and that there would be a ripple effect among people thus wanting to divest from those stocks.
"The biggest story — pardon if you are [a Sen.] Bernie [Sanders] fan — there was a little breath of relief and we saw the market go up when [former Vice President Joe] Biden won Super Tuesday," Fernandez said. "The thought of a socialist president of the U.S. was scaring some people. I think the market has already factored in that under Biden or Trump, life is not going to change that dramatically. For most people in our industry doing business, life will go on."
As principal of The Estate Cos., Jeffrey Ardizon develops multifamily apartments (usually under the Soleste brand), stabilizes them and sells them to institutional investors.
"This environment is somewhat good for multifamily for various reasons," Ardizon said. "One, the cap rate, and two, the cost of the debt ... The cost of the debt is really attractive and multifamily buyers or investors out there trying to penetrate markets, it's very attractable time right now. [Coronavirus] is a temporary market dislocation, and people will take advantage."
As for impact on his own business, one investor who intended to fly down to look at a project had to cancel a trip, but other than that it has been muted.
"In terms of actual valuations and that fear in the stock market, we're not seeing that fear within the multifamily industry," he said. "I do think we are seeing an advantage from what's currently happening. Demand is demand, and that's still there."
Real estate players are keeping an eye on other aspects of capital markets, including the transition from Libor to SOFR, which Ashraf predicted will be "just like Y2K," opportunity zone financing, which could pick up now that Treasury Department rules are in place, and EB-5 investments, which could be slowed due to higher investment requirements put in place last year and freely available capital from other sources.
Ashraf is actually expanding Lotus. He will soon open a Florida office, for which he is now looking to hire key positions, and is launching a restructuring business. Currently, he said, he is working on nearly $1B in deals tied to South Florida projects, and he expected all of them to close. "They'd better!"