Brokerages are gearing up to handle more loan-sale assignments as new financing deals have slowed to a trickle due to the pandemic. Sales of commercial mortgages have picked up in recent weeks as sellers look to free up capital. But pros believe the market hasn’t even seen the tip of the iceberg, and that offerings of both performing and nonperforming loans will explode later this year.
“We expect a primarily performing loan-sale market, designed to create liquidity, to unfortunately devolve into a more distressed market over the duration of the year for highrisk asset classes and transitional properties,” said Dustin Stolly, co-head of Newmark’s debt and structured-finance group.
Newmark and other brokerages are preparing by tapping senior debt- and equity-placement specialists to work on the expected wave of loan-sale assignments. Eastdil Secured likewise has executives devoting more time and resources to advising on potential loan sales. CBRE, which has a national team dedicated full-time to loan sales, can also draw on its network of capital-markets staffers.
As business closures have disrupted property cashflows and put valuations in question, the normal flow of debt-brokerage assignments for acquisitions and refinancings has slowed sharply. And while the uptick in offerings of outstanding loans and portfolios won’t make up for that lost business, it provides brokerages with an alternative revenue stream — and a way to provide additional service and maintain relationships with clients.
Michael Van Konynenburg, president of Eastdil, said that loan sales amount to 5-10% of the firm’s debt business in a normal year, but soared to about 50% during the downturn in 2009-2011. At such times, he said, the firm’s non-commission approach serves it well, as both equity and debt brokers are incentivized to work together and share the firm’s bonus pool. Today, client pitches involve having both equity and debt brokers talking about specific assets and markets with a “bottom-up view of property underwriting and loan underwriting,” Van Konynenburg said. “It’s really giving lenders the feedback that we see in the underlying asset market,” he said. “When it’s a normal market, you’re not doing that as much. Now it’s, ‘Here’s what we’re seeing on the ground’ . . . and providing advisory work to lenders, versus more advisory work to borrowers.”
At CBRE, Patrick Arangio heads up the national loan-sales team, which generally numbers about a dozen people handling that work exclusively. They provide comprehensive underwriting and input on current pricing expectations, allowing clients to weigh the pros and cons of floating an offering.
“I have spent the last 20 years of my career specializing in loan sales,” Arangio said. “Not all loans are perfect sale candidates all the time. It is essential to be strategic — now more than ever.” CBRE is able to tap various units under its corporate umbrella to contribute data to a loan-sale process.
“We had multiple large portfolio-sale assignments during the last cycle where we tapped 15-20 separate teams with hundreds of CBRE professionals,” Arangio said. He added that the business has already picked up, with expectations it will likely grow at least through the summer and fall.
“Based on the volumes we are currently underwriting, it is possible that the coming year could be historically significant with regards to loan sales,” Arangio said. “And if the volume of inbound calls from buyers is any indication, there is no shortage of capital available to invest in both the performing and nonperforming loan space.”
Stolly and Van Konynenburg agreed there are a large number of investors with cash on hand, ready to move as soon as they feel the time is right. Newmark has staffed loan sale assignments with product and investment-sales and local-market specialists, giving it the ability to value and sell clients’ mortgages in uncertain conditions, said Jordan Roeschlaub, co-head of Newmark’s platform.
Many advisory shops are extending their reach now, he added, because they have experience and relationships with clients — but also because they have the capacity for that business.
“Thus far there’s been a willingness by existing lenders to extend term,” he said, which may change but for the moment has reduced the need for refinancings. “We have evolved as strategic advisors to our most important capital relationships and investors, to sell and value loans.”
The consensus is that the next few months will see mostly performing loans on the block. Some sellers will be looking to trade in their positions for cash that they’d then deploy into other strategies as they scout for yield in a down market. Along with that, or shortly afterward, would come sellers seeking to offload mortgages because of concentration issues — they may be overweight on loans on Class-B office properties in a certain market, for example. Some 4-6 months down the road would come a larger wave of loan offerings with a substantial proportion of nonperformers.
Those will appear after the initial round of 90-day debt-service deferrals from lenders expire and relief from government actions, such as the Paycheck Protection Program, wear off. At that point, if more businesses haven’t reopened and the economy hasn’t revived, property owners will have to decide if they can continue to service their debt.
The work is “100% about underwriting the breadth and depth of the recession,” Van Konynenburg said. “People want to understand first what we think property value is and where do we think things are going to trade. People are still, by and large, in the exploratory phase and evaluating all of their options.”
