Market Dynamics Remain in Seller's Favor

December 2020

November continued the momentum from October. DebtX sold $67MM for five clients. Twelve of fourteen sales offerings closed, an 86% trade rate. We bid another $120MM the first week of December. An additional nine sale offerings totaling ~$130MM are scheduled to bid prior to year-end. It is another busy close to the year.

We are on track to close approximately $700MM in loan sales in the second half of 2020. Loan pricing requests rapidly increased beginning early summer, and loan sales started to accelerate a couple of months later. Approximately 40% of trade volume is hotel loans, followed by healthcare and small balance commercial at ~17% each. Retail, office and multifamily loan sales total ~20%, with the remainder a mix of special use, single-family residential and other miscellaneous. Recently, we’ve seen an increase in loans secured by office buildings and special use facilities, such as churches, restaurants, health clubs and entertainment venues. Based on deal discussions and loan pricing requests, we expect this volume to accelerate in 2021.

Investor interest and activity remains at record levels allowing banks to exit loans and portfolios within manageable and predictable budgets. Fortunately, the current market is much more hospitable for executing transactions than 2008-09, which was characterized by a gaping bid-ask spread.

Market Observations

Pricing – Pricing remains elevated. Every deal is different and expectations play a role, but we have yet to see any evidence of broad-based price softening. Our sale volume is up, but we are nowhere near market capacity. As a result, supply-demand dynamics remain in the seller’s favor, keeping prices elevated. This said, we are closely monitoring CMBS special servicing data, and numerous markets/sectors with high default rates, sublease activity and declining rents. While bank loans and borrowers are often different than CMBS loans, a wave of CMBS loan sales will present additional options for buyers. Secondly, foreclosure sales could negatively impact underlying collateral values, resulting in softening loan pricing.
Participation – Sales remain well attended, and investor registrations continue to increase. November sales averaged 220 separate investor groups executing confidentiality agreements to review deals. There were 12 hard and final bids (due diligence completed) per loan offering.
Small Loans and Pools – Investor bid ranges have tightened a bit. Bidding activity suggests that investors at the low end are getting more aggressive to win deals, while those at the high end are maintaining or slightly increasing their bids to stay on top.
Large Loans – Investor bid ranges remain wide for larger loans in general, and hospitality, retail and healthcare specifically. This is driven by a combination of factors including differences of opinion about collateral value, varying return requirements, and to some extent just a simple need to put capital to work. It’s not uncommon to see very wide gaps in the overall range of bids submitted, and high bids significantly in excess of the cover (2nd place) bidder. The point is that wide marketing is critical. The best bidder on one deal might be well off the mark on another, seemingly similar opportunity.
Sale Structure – Bid data indicates that individual sale offerings while enabling investors to create bespoke pools, remain the optimal execution strategy. Retail capital is abundant, and allowing investors to choose their preferred bidding strategy
(individual and/or combination bids) is leading to optimal results.