Q&A With CBRE’s Brian Stoffers
- Apr 01, 2020
The U.S. Federal Reserve slashed interest rates for a second time in March in response to the spreading COVID-19 crisis, and more recently it reinstated the Term Asset-Backed Securities Loan Facility (the “TALF” program). Will these moves help bolster the real estate capital markets when the economy seems destined for recession?
Brian Stoffers, CBRE’s global president of Debt & Structured Finance, spoke with Commercial Property Executive about the mortgage industry’s current uncertainty. Stoffers also shared his prognosis for the U.S. financial sector in light of the coronavirus outbreak.
What is your take on the Fed’s second rate cut in March?
Stoffers: The Fed cut to 0-0.25 percent has had a positive impact, but this effect is in reaction to the worsening COVID-19 crisis. Unfortunately, spreads have widened since, muting the positive impact of the lower indexes.
The capital markets environment has been significantly stressed since the COVID-19 situation erupted in the U.S. and Europe. While the interest rate reductions taken by the Fed have brought the overnight rate to near zero, both the 10-year Treasury rate and LIBOR have moved independently. Both are lower as well, but credit spreads have moved dramatically during this period of economic uncertainty.
Recent Fed buying through the TALF program has brought spreads in considerably on certain bonds, like those backed by the GSEs and AAA-rated corporate credit. Credit spreads on lower-rated CMBS bonds and non-investment grade corporate paper remain very wide. As a result, net rates to borrowers are currently still wide of pre-crisis levels by 100 basis points or more.
What do the rate cut and the Fed’s measures mean for lenders and borrowers?
Stoffers: Rate cuts have been positive but offset by credit spreads that have widened dramatically. Recent action by the Fed in enacting a new TALF program has resulted in narrowing spreads for agency bonds. Credit spreads for BBB-rated CMBS bonds have yet to respond as they are not covered by the TALF program, while AAA-rated CMBS bonds narrowed somewhat last week. Hopefully, the TALF program will be expanded in the next three to four weeks to include AAA-rated CMBS bonds as well.
Can you tell us which types of lenders are most likely to be affected by the looming recession?
Stoffers: CMBS and debt funds are the most affected. Lenders on lodging and retail are likely to experience the brunt of the coronavirus outbreak. Life companies have hit the “pause button” quite frequently of late, given the volatility in the credit markets. Most life companies price their commercial real estate debt based on BBB-rated corporate spreads.
How does the current global economic climate compare to 2008? What’s your prognosis for the U.S. finance sector?
Stoffers: The Fed’s actions during the COVID-19 outbreak have been much more rapid, that is, a matter of weeks versus the many months taken to deal with the situation in 2008. Going forward, in the short term we’ll be dealing with many issues, but long term, it will be a steady recovery. Think of a “Nike Swoosh” shape.