'There’s Liquidity Out There; It’s Just A Matter Of Shaking It Free'

It’s been a strange recession, with certain sectors like retail and hospitality collapsing and millions of low-wage workers losing their jobs, while higher-paid office work largely continues in home offices. And far from killing deals, investment opportunities abound in the era of the coronavirus, according to experts.

“I don’t think that I have ever in my career worked this intensely and had this much going on at any one time,” McCaffery Interests Senior Managing Director Tom Shanabruch said during Bisnow’s Chicago Deep Dish: Capital Markets & Future Opportunities webinar last week.

Shanabruch helps plan, underwrite and finance the firm’s developments, such as Lincoln Common, a new 6-acre, mixed-use complex on the former site of Children’s Memorial Hospital that was developed by McCaffery Interests and Hines.

Things did slow down starting in March, he added, as most market players were trying to grasp the nature and impact of the pandemic. But that was the past. The company is looking for capital on three projects — two ground-up developments and one acquisition — and wants to recapitalize the construction loan for Lincoln Common, among other potential deals.

“There is a lot going on in our world,” Shanabruch said.

Others agree.  

“I am beyond busy right now,” Bank Leumi Chicago commercial real estate lead Jerry Lumpkins said.

Lumpkins started with Bank Leumi early this year and was tasked with building its commercial real estate platform in Chicago.

“It’s 15-hour workdays,” he said. “There’s no longer any lines between work life and home life.”

Webinar moderator Collete English Dixon, the executive director of Roosevelt University’s Marshall Bennett Institute of Real Estate, wanted to know what players are ready to invest now and which sectors have their interest.

“What are they expecting in return for their cash?” she asked.

Shanabruch said after the springtime slowdown, institutional investors and family offices began looking at suburban assets, including residential, office and senior housing properties, all seen as relatively protected from the worst of the ongoing recession.

“There’s liquidity out there; it’s just a matter of shaking it free,” he said.

But not everyone is on the prowl for new deals, Lumpkins said. Although life insurance companies are active, and Freddie Mac and Fannie Mae also seem busy, banks have tended to hunker down and deal almost exclusively with existing clients.

“My friendly competitors have basically turned into portfolio management shops,” he said.

Shanabruch said he sees a similar dynamic at work. McCaffery initially began trying to recapitalize the Lincoln Common loan in March, but when the pandemic hit, the company decided to hold off. It restarted the effort in August, and so far, there hasn’t been a shortage of willing partners.  

“The response was absolutely incredible, but it wasn’t from the big banks in the U.S.; it was the life insurance companies and offshore banks that were jumping in but also being extremely aggressive,” he said.

The company fielded a wide range of options, from loans with three-year floating rates to ones with 10-year fixed rates, Shanabruch added. He takes it as a sign that capital markets will respond to quality assets like Lincoln Common, even if much of the economy continues to struggle.

“By the time we’re done with this loan, we will be extra happy,” he said.

But things have still gotten tougher for those trying to score capital, Lumpkins said. In normal times, Bank Leumi would agree to a 75% loan-to-value ratio, but today’s overall uncertainty changed that. Multifamily developers can now expect perhaps a 70% ratio, and office developers around 60%.

“If it’s retail, the deal is just not getting done,” he said. “That’s a tough industry and a tough product type. Eighteen months ago, if a guy brought me a Walgreens, I’d have been all over it.”

The bank’s underwriting approach has also gotten tougher, but these new conditions are probably temporary, Lumpkins added.

“Most of this is COVID-related, so once we get COVID in our rearview mirror, do we go back to our normal underwriting standards? I think so.” 

Both Shanabruch and Lumpkins were a bit surprised that there have been few distressed assets getting snapped up.

“There is a lot of money that’s being piled up and readied to go after distressed assets,” Shanabruch said.

A factor that may be holding off any rush for such properties is a lack of desire to take over troubled assets in a sour economy.       

“A lot of the things in trouble now were in trouble before,” Shanabruch said. “Regular malls have been in trouble for 10 years, so there are not a lot of buyers unless it’s a deep repositioning play.”

“What do you do with an empty hotel or an empty 1M SF suburban mall?” Lumpkins asked.

But those beliefs could soon change. 

“A lot of my clients are patient and have patient dollars. It is coming.”