Hotel rooms, office buildings and other commercial properties were lonely places last month as much of the nation operated under stay-at-home orders.
Being a property owner might have made the lockdowns feel even lonelier.
But as regions of the U.S. begin exploring ways to lift restrictive measures to contain the coronavirus and resume business, there is still plenty of uncertainty around what the toll will be on commercial properties, particularly since new protocols for returning to work, visiting the dentist and dining out are still being formed.
Barry Sternlicht, chief executive officer of Starwood Property Trust, Inc. /zigman2/quotes/202642684/composite STWD +0.36% , this week described how hotels might begin resuming operations. “I think hotels, all hotels, will figure out how to operate with lower breakevens with fewer less-profitable parts,” he said during the real-estate company’s first-quarter earnings call.
“There won’t be restaurants, there may not be room service, but they will try to fill heads and beds and staff to demand.”
And yet, commercial property owners are starting to see a key funding spigot, namely the issuance of commercial mortgage-backed securities, a type of property bond, stage a limited comeback after the sector froze in March as the pandemic took hold in the U.S.
“CMBS is starting to show signs of life,” Jake Remley, senior portfolio manager at Income Research + Management told MarketWatch, while underscoring that some new bond deals have excluded hard-hit property types, namely hotel loans.
By contrast, a range of highly rated U.S. companies, including retail giant Apple Inc. /zigman2/quotes/202934861/composite AAPL +0.53% , have borrowed a record amount in the corporate bond market through the start of this year, effectively socking away cash to offset what may be several painful quarters of business.
Those floodgates opened only after the Federal Reserve unleased its balance sheet to shore up financial markets, including laying out plans in March to buy U.S. corporate debt for the first time ever, through a series of emergency funding programs. Later, its plans were expanded to include speculative-grade, or junk-rated, company debt, which are expected to start soon.
The program open to CMBS is the Fed’s $100 billion Term Asset-Backed Securities Loan Facility, of TALF 2.0, as it’s known on Wall Street.
But unlike the Fed’s corporate debt facilities, TALF’s current scope is more restrictive and excludes newly issued and riskier CMBS with below-investment-grade credit ratings.
“The Fed is signaling they’re willing to support liquidity,” Remley said. But he also said the central bank is sending a message that not all types of debt are welcome, since eligibility is partially dependent on ratings. “That is going to create winners and losers and have some knock-on effects in the economy.”