CRE Lenders Active, But On Conservative Terms

Many lenders are facing substantial headwinds and as a result, underwriting criteria has become more conservative as a need for adjusting strategies comes about in a post-pandemic environment.

While COVID-19 has affected nearly every aspect of commercial real estate in one way or another, one of the most fundamental consequences has been in lending, where strategies are being adjusted for a post-pandemic environment. Many lenders are facing substantial headwinds and as a result, underwriting criteria has become more conservative, according to a recent report by Marcus & Millichap.

This conservative stance has resulted in fewer options for some borrowers. While liquidity has remained ample, loan to-value ratios contracted as the health crisis unfolded, now resting in the 50 to 70% range, depending on the deal and borrower. Debt service coverage ratios have also shifted, rising to the 1.6 to 1.9% range. In some cases, more weight is placed on the strength and experience of the borrower than the asset itself.

Even in the multifamily space, where government-sponsored enterprises have been active, debt service reserves are now often required for multifamily mortgages and most underwriting assumes no rent growth for roughly two years. In addition, assumptions surrounding operating expenses, vacancies, market concession rates and supply trends are being closely examined by lenders, leading some to shift focuses to more pandemic-resilient investments.

Apartment and industrial properties have been able to draw greater interest with banks and non-agency lenders remaining active originators, most often funding five- to seven-year loans with rates in the upper-2 to mid-3% range. Evolving e-commerce trends, challenges in the single-family home market and limited capital expenditure requirements have helped to ensure financing remains available at favorable terms for both asset classes.

Most lenders have been more selective when assessing office properties in spite of strong rent collections, favoring suburban office deals while requiring loan-to-values closer to 50% for buildings in larger downtown markets. Life insurance companies have been targeting lower leverage deals in the sector as well as focusing on multifamily and single-tenant retail assets.

That all said, access to debt capital has been far more abundant than during the global financial crisis, while the Fed has been taking extreme steps to shore up credit markets and ensure liquidity flows. In part for those reasons, lenders are still working with retail borrowers to provide payment relief for troubled assets, limiting foreclosures and greater price fluctuations. New lending for the more impacted segments including smaller restaurants, gyms, movie theaters and hotels face a significantly shallower lender pool and lower loan to values due to the elevated delinquency risk of these assets.

Back in the second quarter, commercial real estate loan closings declined nearly 21% year-over-year, the result of the pandemic-related temporary freeze in lending and transaction markets between mid-March and early April, according to a CBRE index.

However, following the second quarter investment slowdown, buyers are now increasingly active with more lenders in the market. While sales activity remains well below activity of a year ago, transaction velocity climbed approximately 25% from the second quarter to third quarter with a shift in priorities to reflect evolving opportunities and risks, says Marcus & Millichap.

Source: Globe St.