The early part of 2020 was optimistic for the commercial real estate (CRE) sector. The market was buss with lending activity, and both lenders and investors were expecting a record year.
Despite ongoing trade wars, geopolitical issues, elections, and a mature real estate cycle, all forecasts looked promising. These variables have failed for months to slow down CRE finance activity and transactions, after all. There was no reason to worry.
Until the pandemic came along, of course, while CRE lenders and investors were somewhat aware of the impacts of the COVID-19 virus abroad, most didn’t accurately anticipate how much it would impair the business of commercial real estate once it hit US shores.
The pandemic was a shock—something unprecedented, something we never thought we would witness in our lifetimes.
It has shifted the CRE industry’s focus from a potential politically-induced downturn to a dramatic and immediate decline whose root cause was something that seemed so insignificant just a few months ago.
COVID-19 has affected different parts of the country in differing degrees. Big cities like New York remain the most problematic epicenters, as expected.
Simultaneously, other areas that are less populated and don’t get a lot of air traffic from Asia and Europe have fared better, their infection rates significantly lower.
The severity of lockdowns and timings of safety protocols also varied significantly—as did re-opening strategies.
However, CRE activity and lending have slowed down tremendously across the board, and uncertainty prevails. Now many months into this global health crisis, we are seeing the following trends that indicate the state of CRE capital markets, specifically on the availability of capital and who (and who isn’t) lending these days.
Most CRE lenders are slowing down activity and sitting on the sidelines, waiting for some clear recovery signs. Even the most prolific of debt providers have ceased all transactions—and this has left legitimate borrowers who have already lodged their applications and submitted all requirements hanging.
Debt providers cite warehouse credit line problems and liquidity issues as the main causes of halted activity. Additionally, many of them quite simply don’t want to take risks in such uncertain times.
This departure of lenders from the CRE market causes a severe shortage of financing solutions for many borrowers—many of whom still have definite business plans and are making a good income from their investment properties despite the mayhem that the pandemic is causing in the overall economy. In short, no one is lending even to ‘ideal’ low-risk borrowers.
The few CRE debt providers that are still active in the market typically have unique market perspectives or business models. Lenders that focus on distressed debt, for example, tend to thrive in down cycles.
Those with deep CRE expertise and those that operate complimentary property investment businesses also tend to be more active in lending funds to qualified borrowers despite the uncertainty brought about by COVID-19. They are, of course, implementing rigorous underwriting standards.
And then there is the life-of-loan lender, also active in this pandemic. These types of debt providers oversee the entire loan duration—from origination to maturity. The service, securitize and invest in the b-piece.
They are fully invested in the loan’s success and are committed to providing better services to borrowers, seeing them as long-term partners instead of fleeting transactions. They are also better aware of their clients’ needs, putting them in a great position to assist with refinancing, agency relief program navigation, debt for additional assets, and default prevention.
In today’s market, not all commercial asset types can get quick access to capital, which is severely limited, to begin with. Retail and hospitality assets have fallen out of favor because COVID-19 has essentially annihilated both business and leisure travel while restricting brick and mortar shopping.
Logistics and warehousing CRE have remained attractive, specifically those that deal with the distribution and supply chain of essential goods and food.
Lenders are also still providing debt for apartments, but there are concerns in this sector because of the threat of unemployment and, consequently, rent defaults. This anticipation is driving many lenders to the sidelines, though some are still in the game.
The pandemic is expected to push unemployment rates to new heights. The continued increase in the number of furloughed staff is understandably causing some jitters in the apartment sector.
Complicating the matter is the fact that many regional legislators all over the US have delayed or even completely banned eviction proceedings from providing renters who are out of jobs some reprieve, at least temporarily.
Rentals are expected to be severely impacted but are still in high demand, particularly when the affordable categories where there is a shortage. The health crisis is likely to push demand for lower-income rentals even higher. It’s no surprise that Fannie Mae and Freddie Mac continue to finance these properties even in this economy.
Notably, the slowdown in home sales is increasing demand for multifamily apartments, too. People who are currently out of work are less likely to purchase homes until they find some financial stability—which might not be for at least a year or two.
Home mortgages have likewise become harder to secure. Rates are still sitting at historic lows, but the FHA and many other mortgage lenders now want higher FICO scores. Some also require bigger down payments.
While there are fears about renters being unable to make rent, these other variables seem to be bringing the apartment sector back to health. It is recovering much faster than other CRE asset segments like hospitality and retail. And experts say that once the multifamily sector recovers, hesitant lenders will start to get back in on the action.
There’s no denying that the pandemic is wreaking havoc on the commercial real estate businesses, but it’s not all doom and gloom. There is still significant activity in the market. Borrowers can expect more stringent underwriting, of course, but qualified borrowers still have a good chance of getting financed. The industry is also bracing for an expected flood of distressed debt, both from an investment and special servicing perspective. CRE investors are advised to proceed with caution while taking advantage of opportunities.
That said, it’s important to be ready for anything. Moody’s Analytics projects the second recession in 2020 and a temporary but harsh decline in CRE valuations between now and the first few months of 2021. Substantial recovery is not expected until 2022.
Borrowers may need to be creative in holding on to their properties. Because CRE is largely a business of leveraging, many investors and property owners may face the challenge of restructuring their loans to achieve more realistic economic terms—and ultimately prevent loan defaults and foreclosures. It may also make sense to explore other types of CRE financing outside of traditional debt.
Talk to the Capital Investors Direct team if you would like to know your options. Together, we can work to resolve your property financing issues. We are hard money lenders in Maryland-based CRE investment advisory firm with offices all over the US.
Contact us today if you’re interested in customized commercial real estate loans, stated income commercial loans, or commercial bridge loan lenders solutions that are not available from traditional lenders.
No matter what the size of your CRE project, we can find a suitable solution for it. Fast closing, reasonable interest rates, a highly customized loan structure, and a simple application process—that’s our guarantee.
