Mapping the New Lending Landscape

Insights from capital markets leaders on what to expect during the most challenging climate for real estate finance in recent memory.

Commercial real estate lenders are finding their footing after months of economic turbulence. The result is a financial picture that has changed severely over the course of a few months. Following record commercial and multifamily lending in the fourth quarter of 2019, the onset of the pandemic triggered a widespread slowdown in originations. Though debt is available, the economic disruption is dictating stricter underwriting, higher costs of capital and selectivity about financing assets in hard-hit categories.  

In a sobering mid-July forecast, the Mortgage Bankers Association projected a 59 percent overall decline in commercial and multifamily lending for 2020. Volume is on track to fall from 2019’s record-setting $601 billion to $248 billion. Multifamily lending volume—which reflects some loans by small and midsize banks not included in the overall total—will decline from $364 billion in 2019 to $213 billion this year, MBA estimated. A modest rebound—$390 billion in total lending and $308 billion in multifamily lending—is expected for 2021. 

READ ALSO: CMBS Deliquencies Multiply, Report KBRA and Trepp


Shelter from the storm

The Shops & Restaurants at Hudson Yards. Image courtesy of Getty Images via Related Cos.

Lenders have responded quickly and decisively to the new conditions. A report released in early May by the Federal Reserve found that 10 in 15 banks surveyed had tightened their lending standards for commercial real estate loans and credit lines during the previous three months. 

Life companies, too, are raising the bar. “We probably have adjusted values anywhere from 5 percent to 15 percent across the board,” said Doug McKinstry, a managing director at Principal Global Investors, during a June webinar sponsored by the Urban Land Institute.

Though life companies have tightened their standards, like other lenders, the positive news for borrowers is that they have returned to the market after initially retreating to the sidelines late last winter. “The life companies went into this recession with very low-leveraged balance sheets”—typically in the 50 percent range, McKinstry noted. That, in turn, “allowed the life companies to come in pretty quickly in this situation.”

Even after the crisis hit, the resilience of apartment assets has continued to attract lenders. John Hofmann, who oversees originations for KeyBank, reported steady activity across the company’s Fannie Mae, Freddie Mac, and Federal Housing Administration businesses, as well as for commercial mortgage-backed securities and bridge loans. “We had a large pipeline of business going into this and we continued to execute for our clients through this time,” he said. “Most notable is the continued demand that we saw in our government-sponsored enterprise space.”

One area of multifamily financing notably dampened by the virus, however, was development. Lenders have pulled back on construction financing, stalling projects nationwide. Marcus & Millichap and REIS project that some 250,000 units will open in the U.S. this year, down from an earlier forecast of 300,000 units. 

But there are exceptions, such as New York Life Real Estate Investors’ $97 million construction loan in June for two residential towers in Sunny Isles Beach, Fla. Meanwhile, the GSEs continued to provide significant refinancing deals, including $91.3 million from Fannie Mae for a four-asset Tucson, Ariz., portfolio in June. 


Prologis Georgetown Crossroads in Seattle. Image courtesy of Prologis via NELSON Worldwide

Workers and warehouses

According to preliminary figures from Real Capital Analytics, during the second quarter, refinancing office properties declined 30 percent year-over-year and decreased 20 percent compared to the first quarter. Yet lenders are still willing to provide debt for high-quality office assets. In one of the largest such deals for the first half of the year, SL Green Realty secured the $510 million refinancing of the News Building, a 1.2 million-square-foot midtown Manhattan office tower. A consortium comprising Aareal Capital Corp., Citi and Credit Agricole provided the loan, which was announced in late June. SL Green applied the proceeds to the balance on its $1.5 billion unsecured revolving credit facility.  

The finance community is bullish on industrial real estate, as consumers’ increased reliance on e-commerce growth is helping to insulate the sector from the worst effects of the crisis.   

“I think the only traction you’re going to get on construction right now is multifamily and industrial, and that’s where we’re seeing requests come through,” said Scott Modelski, a managing director at Black Bear Capital Partners. A ground-up speculative industrial project in Denver is among the firm’s current projects.

Though debt is available for industrial and multifamily development, lenders have tightened underwriting for both categories. Before the recession, debt funds would provide loan-to-value ratios as high as 85 percent for ground-up industrial projects, Modelski said; that has declined to the 70-percent range. 

Similarly, commercial banks have trimmed LTVs for industrial development from the 70-percent range to the 60-percent range. And multifamily sponsors can expect construction loans from banks to top out at LTVs around 65 percent and loans from debt funds to peak at 70 percent to 75 percent. 

Facing the music

Chicago skyline. Image courtesy of PointsofNoReturn

The pandemic has raised the stakes for financing in several asset categories that were already facing serious challenges. “Malls have been difficult to finance for some time,” said Brian Stoffers, the global president of debt and structured finance at CBRE. “Class B and C malls have been struggling; it was well underway pre-COVID-19. The 100 or 200 trophy malls across the country are in a different league, but they’re also being affected because of bankruptcies.”

Triple Five Group, the developer of the Mall of America in Minnesota and the American Dream mall in East Rutherford, N.J., is among the retail owners facing financial challenges stemming from the pandemic. The Canadian firm was forced to temporarily close the long-awaited American Dream just a week before the first wave of retail shops were slated to open, and to shift its leasing strategy to focus more on entertainment-related tenants. The company has also missed a series of monthly payments on the $1.4 billion mortgage for the Mall of America, according to Bloomberg.

Freestanding locations and strip and open-air shopping centers have outperformed enclosed malls, and some necessary retail is retaining the confidence of lenders. 

“Our retail portfolio has held up better than expected—no doubt because half of it’s grocery-anchored,” said Mark Melchione, the executive vice president & head of commercial real estate at People’s United Bank N.A., during the Urban Land Institute’s capital markets panel in June.

Though renewed travel close to home has helped hotel occupancy rally from its spring trough, the hospitality sector’s much-discussed struggles are turning the industry’s search for debt financing into an uphill climb. 

The performance of securitized loans indicates the challenges facing the hospitality sector. According to Trepp data, the overall delinquency rate for lodging CMBS surged from 2.71 percent in April to 19.13 percent in May, representing some $16 billion of loans that were more than 30 days late on their payments. Early June data based on some 85 percent of private-label CMBS hotel loans showed a lodging delinquency rate of 24.44 percent.

“I do think the finance market for hotels is going to remain constrained for some time,” said Stoffers, “which means there could be opportunity for someone who’s willing to take a little bit more risk.”

Read More About the Outlook for Lending in the CPE-MHN 2020 Midyear Update.

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