Quarterly Market Snapshot: Robust Liquidity Versus Challenging Expectations

May 2024

The last 12 months have been as busy as any period in recent memory. However, you’d never know it based solely on marketed loan sale volume. We’ve seen and priced in excess of $10 billion in performing (~70%), substandard (20%) and nonperforming (10%) loans. Many lenders have experienced a slowing in organic portfolio runoff and are often hamstrung by low coupon legacy loans, while also unable to book a significant volume of new loans at today’s higher rates due to existing CRE and construction loan concentration. This led numerous clients and prospects to examine sales of transactional accounts (ie: no deposits) to manage concentration challenges and generate dry powder for new loan originations with a focus on depository relationships. While this kept us very busy pricing loan positions for our clients, the “pull-through” to marketing assignments has been very low from historical standards as pricing estimates often failed to meet expectations.

While low coupon legacy performing loans have proven difficult to transact on at many seller’s expectations, meaningful traction has taken hold in the non-pass rated substandard and criticized loan category. Disappointing market-wide secondary market volume has encouraged capital-flush, yet deal-starved investors to sharpen pencils in order to put capital to work. Lenders selling into this market are often able to exit credit at levels (80’s – par) seen in many performing loan sales, while reducing non-core and substandard exposure with a higher expected loss under CECL.

Supply-Demand Dynamic: Dismal overall secondary market volume continues to frustrate investors and brokers alike. This keeps investor interest high and pricing elevated above that of a natural equilibrium that one might otherwise expect given increased interest rates and mainstream doom and gloom around commercial real estate. No amount of excess capital will save the downtrodden B-C office with huge vacancy and capital requirements, but at least for now, a lack of high yield and NPL supply is keeping a lid on investor yield requirements.

Strategic One-Off Sales: Office and healthcare CRE are obvious candidates but “idiosyncratic” exit credits, across multiple CRE asset classes along with C&I seem to keep popping up notwithstanding resilient reported credit metrics at most banks. Out of footprint, acquired, and single loan or transaction-only oriented customers tend to be first in line as exit candidates. 

Small Balance Pool Sales: Until relatively recently, years of fiscal and monetary stimulus more than offset the impact of higher borrowing costs and inflation-driven expenses, keeping delinquencies low across small business banking, CRE and single family residential. We noticed a reversal in Q4 2023 as more bank clients began reporting higher small balance inflow into special assets, along with prolonged time to resolution. This has prompted numerous clients to exit subperforming and NPL small balance in order to free up workout officers time to focus on larger balance credits and manage headcount within the group.

Office Remains Center Stage: The asset class remains in the headlines and a primary focus of investors, analysts and regulators. We’ve seen pricing assignments virtually nonstop for over two years but the actual market wide transaction volume has been stubbornly slow. Following along the same pattern as the equity sales market, loan sale pricing remains highly bifurcated, requiring a deep dive asset by asset to discern value. While all widely marketed transactions can expect high exposure (150+ NDAs), smaller loans/assets will see more final cash bids than large loans/assets.

Healthcare CRE (assisted living, skilled nursing, hospitals, memory care): While activity has slowed from 2023, loans in this sector remain a common exit candidate. Overall, the industry appears to be faring better as inflation slows, and rents and reimbursement rates increase. Larger operators are recovering faster/better than small, but many facilities are showing the impact of operating in a cash-starved environment for multiple years.

Multifamily: Long a lender and investor darling, the end of Covid-era low interest rates and cap rates, along with high supply in many markets has caught up with many sponsors. Non-bank delinquencies (primarily CLO) have increased substantially as rate caps expire and sponsors are forced to inject capital to purchase new rate caps and/or pay down debt to refinance at todays higher rates. Bank credit metrics are much healthier but are clearly “normalizing” as total delinquencies have risen to .59% ($3.7B) as of Q1 2024, from .24% ($1.4B) marking the cycle low as of Q4 2022. The (very) good news for sellers is that multifamily remains an investor darling, with significant pent up demand following a trough in investment in 2023. Quality widely marketed deals of any size can expect upwards of 150 NDAs and numerous bids from high quality investor counterparties.

 

Representative Transactions

(representative photos, actual collateral assets confidential)

Memory care facility
$9.7 Million
Healthcare | Performing
$33 Million
Hospitality | Performing
$53.7 Million
C&I | Performing
$12.7 Million
Multifamily | NPL
$10.9 Million
Office | Restructured
$11.8 Million
Multifamily|Restructured
$38 Million
CRE/C&I | Performing

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