Capital Alert: Spring Arrives with Promise but Concerns Linger

April 8, 2021

Spring Arrives with Promise but Concerns Linger

A full year after the onset of the COVID-19 pandemic, numerous promising trends have emerged, but they are mixed with a variety of risk factors and uncertainty. Nearly 20 percent of the U.S. population is now vaccinated, and 3 million doses are being administered daily. Though this raises optimism, questions remain about the effectiveness of the new vaccines against new Covid variants. The positive outlook has been further brightened by the $1.9 trillion third round of stimulus and President Biden’s proposed $2 trillion infrastructure program targeting repairs to the nation’s roads, bridges, train lines and utilities. This unprecedented spending could help fuel a strong economic rebound, but it also raises concerns about the federal deficit, which could reach record levels in relation to the U.S. gross domestic product (GDP) in 2021. This in turn raises the specter of inflation risk and the potential for higher taxes.


The outlook for central business districts also continues to brighten as large employers, including Morgan Stanley, Microsoft, and Google, have declared formal plans for a phased return to the office. At the same time, questions abound regarding the reopening timeline of urban retail stores, restaurants, entertainment venues and other lifestyle amenities. These hurdles may be compounded by significant municipal budget shortfalls that could slow the recovery of many cities and states. Nonetheless, progress toward recovery is being made, and that is bolstering the 2021 outlook for economists, corporate executives, small business owners and consumers.

Consumer confidence surged to a one-year high in March on hopes that accelerating vaccinations and the new round of stimulus will drive a labor market recovery

In a live webcast last week, Marcus & Millichap President & CEO Hessam Nadji summed up the current market environment, noting that the combination of a potentially very strong economic recovery, low interest rates and exceptional market liquidity reinforce commercial real estate as a compelling investment. Nadji discussed the economy, interest rates, inflation and the commercial real estate outlook with Brian Bailey, Senior CRE Policy Advisor with the Federal Reserve Bank of Atlanta, and Paul Lewis, Senior Vice President, National Director of Agency Programs for Marcus & Millichap Capital Corporation.


Consumer confidence surged to a one-year high in March on hopes that accelerating vaccinations and the new round of stimulus will drive a labor market recovery. That prospect could be amplified by the release of pent-up savings as cities and states reopen local economies. Emphasizing that he was voicing his own personal views rather than those of the Atlanta Fed, Bailey said that while inflation could be a byproduct of the amplified growth and it could potentially surpass the Federal Reserve’s target of 2 percent, the current uptick is most likely a temporary one driven by volatility in the supply chain. He posited that it may last a little while as people return to work but expects a return to normalcy as the global supply system restarts.


The yield on the 10-Year Treasury briefly climbed above 1.7 percent this week to a 14-month high, tripling its level from last August. But within the larger context, the rate has simply returned to pre-pandemic levels. Lewis expects that interest rates will stabilize and will remain range-bound plus or minus 30 basis points.


On the lending front, spreads have widened, debt funds and credit unions remain active, and the quality of both the asset and sponsor remains paramount. Competition among banks, private debt funds and life companies is strong for multifamily assets. Banks and life companies are comfortable lending at loan-to-value ratios of 65 to 70, while debt funds may go higher up the debt stack to 75 percent. The agencies are comfortable with LTVs ranging from 75 to 80 percent and on low-leverage transactions they are paring back COVID reserves requirements.


With confidence and hope mixed with some caution, the investment outlook for 2021 will be particularly complex. In this environment, investors and owners must align short- and long-term strategies that integrate a range of financing options. MMCC advisors are uniquely positioned to help investors evaluate numerous financing options within the context of their portfolios to devise strategies for navigating this changing landscape.