Commercial Real Estate Lending And The Coronavirus: The State Of Finance Today
May 13, 2020
The start of the year brought significant lending activity in the commercial real estate sector. So much so, in fact, that many lenders reviewing their pipelines were projecting a record year. Certainly, economists and industry participants alike were monitoring various dynamics - ongoing trade wars, elections, geopolitical issues and the highly mature real estate cycle–in a continuation of their concerns from the third and fourth quarters of last year. However, the early 2020 forecast looked promising, as many of these variables had failed over many months to slow real estate transactions and finance activity.
Though many were somewhat aware of COVID-19 and its impacts abroad, most failed to understand exactly how much it could, and would, impair business, real estate and our daily lives once it hit our shores. What has followed our domestic outbreak is something we’ve never witnessed in our lifetimes. While politics and elections remain at the forefront in a highly divisive way, the coronavirus has completely shifted our industry’s focus from a possible and debatable downturn to one that is present, dramatic and whose root cause wasn’t even a blip on our radar just a few short months ago.
COVID-19 has affected regions and states to differing degrees. Where New York remains the country’s most problematic epicenter, other less populated states, as well as those with lower air traffic from Europe and Asia, have fared far better with significantly lower infection rates. Governors and regional officials state-to-state have varied significantly in the scope and timing of their safety measures, lockdown mandates and re-opening strategies, however commercial real estate and the capital associated with it have both slowed down tremendously as uncertainty prevails.
Amidst that uncertainty, key trends and themes are emerging as indicators of the state of real estate capital markets, and more particularly toward the availability of debt, and who is and is not providing it today.
Many Lenders Are Sitting On The Sidelines
There is no doubt most lenders have dramatically slowed activity. In many cases, previously prolific debt providers have completely stopped all transactions, leaving many legitimate borrowers already well through the application process out in the cold. Common causes of this halted activity include liquidity issues and problems with warehouse credit lines. Additionally, many players simply lack the interest or stomach to navigate the risk profile of loans today.
The exit of so many debt providers from the market has unfortunately left a dearth of finance solutions for countless borrowers. And despite the havoc that COVID-19 has imparted on the industry, a solid portion of these borrowers are actually still operating a solid business plan, producing income from their properties and thus represent acceptable risk parameters. Unfortunately, this leaves need unmet as well as numerous borrowers in the marketplace looking for guidance.
Active Lenders Are Those With Unique Advantages
The few commercial real estate lenders active today typically have unique business models or market perspectives. For example, lenders with expertise in distressed debt are more comfortable operating in down cycles. Likewise, debt providers with deep real estate expertise, and who operate complementary real estate investment businesses, will also have a greater appetite to proceed with lending to qualified borrowers during COVID-related uncertainty, albeit while still holding onto stringent underwriting standards.
There is another type of lender, although fairly uncommon, actively lending today – the life of loan lender. This type of lender uniquely oversees the entire duration of the loan from origination through maturity, servicing and then securitizing and investing in the b-piece. This type of provider is fully invested in the success of the loan and is much more concerned with providing enhanced customer service to the borrower. The single-source lender views the borrower less as a fleeting transaction and instead as a long-term relationship. Through the consistent touch points it creates with the borrower, this lender understands the customer’s needs better and holds an ideal position to assist the borrower with refinance needs, debt for additional assets, navigation of agency relief programs, and better prevention of payment and default issues.
The Asset Class Matters
In today’s market, the capital that is available is not equally accessible for all commercial asset types. Unsurprisingly, hospitality and retail assets are experiencing extreme repercussions from Coronavirus, as travel for both business and pleasure has almost completely stopped and brick and mortar shopping has also been dramatically restricted in a majority of states across the country. Warehouse and logistics facilities have remained fairly active, however, with many central to the supply chain and distribution of food and goods, and others involved in essential business. Debt for apartments is still available, but it’s likely that a growing percentage of renters, specifically those unemployed due to the outbreak, will be unable to deliver their lease payments for a period of time. This anticipation has driven many, though not all, lenders to the sidelines.
Multifamily Expected To Recover
Apartments are being closely watched as unemployment and the number of furloughed workers spike. As a direct result, many regional legislators across the country have delayed or outright banned eviction proceedings to give renters a temporary reprieve. Though expected to be negatively impacted, rentals are still in extremely high demand, particularly in the workforce and affordable categories, where available units fall far short of the need. COVID-19 is expected to push demand for these lower-income units even higher. Notably, Freddie Mac and Fannie Mae are still financing these properties in conjunction with their lender partners that share their mission and remain active today.
The for-sale home sector is also an important consideration for the state of multifamily. Home sales have slowed, a key driver of increased demand for apartments. Unemployed workers will be less likely to buy homes until their financial situations turn around. Also, home mortgages have become a bit harder to secure. While rates sit at historic lows, FHA and other lenders have pushed FICO score requirements higher and some are now asking for larger down payments.
While the issue surrounding renters being able to make monthly payments certainly is affecting the sector, these other variables are expected to help bring apartments back to health much sooner than other commercial asset segments such as retail and hospitality. Once multifamily recovers, many of today’s hesitant lenders will also get back in the game.
While the impacts of COVID-19 on commercial real estate lending have been troublesome, there is still some activity happening. Lenders busy today are naturally more serious about due diligence and underwriting, but in many instances qualified borrowers may still get financed. Industry participants are also preparing for an influx in distressed debt, both from a special servicing and investment perspective. It’s safe to say that lenders, agencies, borrowers and residential and commercial renters are all collectively hoping for a safe and timely resolution to the Coronavirus.
Pat Jackson is founder and CEO of Sabal Capital Partners LLC, a single-source commercial real estate lender. Sabal is a partner to both Fannie Mae and Freddie Mac in the agencies’ respective loan programs, financing affordable and workforce multifamily properties nationwide. The company is actively lending today, with no compromise to existing underwriting standards, even while other debt providers are choosing to sit out today’s challenging market conditions.