Capital Alert: Two Steps Forward, One Step Back

April 16, 2021

Two Steps Forward, One Step Back

The world is still getting its arms around the post-COVID era. Positive momentum appears to be accelerating, but it often feels like two steps forward, one step back. For instance, herd immunity is key to full economic recovery and vaccines are now available to almost everyone 16 and older. But 20 percent of Americans say they want to wait and see, or won’t get the shot, one survey found. Meanwhile new daily cases are hitting the highs of last summer, dominated by a variant that is apparently more contagious, and states have paused the use of the Johnson & Johnson vaccine because of a rare blood clotting that occurred in six recipients.


Another example: Federal Reserve Chairman Jerome Powell predicted stronger growth and employment opportunities in the months ahead and reiterated the Fed’s intention to keep interest rates steady this year. Economists surveyed by The Wall Street Journal raised their average 2021 growth forecast to a sizzling 6.4 percent. But 4.2 million adults aren’t looking for jobs because they fear they’ll catch or spread COVID-19. This reluctance could fuel inflation as employers are forced to raise wages.

While there’s lots of activity and significant liquidity, it’s focused on select opportunities.

The capital markets are similarly tentative – humming along instead of zooming ahead. While there’s lots of activity and significant liquidity, it’s focused on select opportunities. Industrial and multifamily remain the market darlings. Apartment rents rose in the first quarter as potential homebuyers stayed put, challenged by a dearth of inventory and higher prices. CMBS spreads have widened a bit in the last 15 to 30 days. But these lenders are continuing to do deals on essential retail, such as grocery-anchored centers and Class A regional shopping centers with high occupancies and extremely strong tenants. The outlook is less sunny for lifestyle retailers: A new UBS report predicts the U.S. could lose between 81,000 and 150,000 retail locations over the next five years, led by clothing, electronics and home furnishing stores.


CMBS is considering loans for high-quality, well-leased office properties with long-term tenants, even in downtowns. But lenders are scrutinizing sponsors and long-term plans by occupiers, including hybrid working models that could affect occupancy down the road. As vacancies creep up in large cities, landlords are offering discounts. In his annual shareholder letter, JPMorgan CEO Jamie Dimon said the bank will adopt more open office plans with fewer seats. “This will significantly reduce our need for real estate,” he wrote. On the other hand, the firm still plans to build a 2.5 million square foot skyscraper in Manhattan, and Dimon’s letter outlined the drawbacks of remote work, saying it impedes collaboration, training, follow-up and spontaneous learning and creativity. (As one headline put it, “Jamie Dimon Will Let Some Bankers Work From Home, but He Won’t Like It.”)


Banks and credit unions continue to be very aggressive, reducing COVID reserves for borrowers who have cured delinquencies from early in the pandemic. But they’re less inclined to do so for sponsors experiencing more recent late-payment troubles. Insurance companies enjoyed a busy first quarter but spreads have widened recently, following trends in the corporate bond market. The bridge space is quite active for multifamily, industrial and self-storage assets. Construction financing is available for transactions with strong sponsorship and a demonstrated need.


As for hospitality, the Centers for Disease Control and Prevention (CDC) eased travel restrictions this month, and April 11 saw the fifth highest day of traffic through airport checkpoints this year. Spring break travelers gave a boost to hotel occupancies, especially in Florida and Texas. A new report found hotel chains pivoted quickly during the pandemic, slashing expenses to lower their break-even point.


The lending environment remains highly dynamic. As always, we invite you to reach out to your Marcus and Millichap Capital Corporation professional for up-to-the-minute guidance, access to an unparalleled network of lenders, and the widest range of capital solutions for your commercial real estate needs.