|As states across the U.S. begin to ease lockdowns, commercial real estate participants are trying to mitigate the impact of the coronavirus pandemic. In its Bi-Annual Financial Stability Report, the Federal Reserve this week warned that asset prices “remain vulnerable to significant declines should the pandemic worsen, the economic fallout prove more adverse, or financial system strains reemerge.”
The Fed said price declines “could be especially pronounced in areas where valuations have remained high and where asset values are sensitive to the pace of economic activity,” noting that CRE prices were high relative to fundamentals before COVID-19, and hospitality and retail have been especially hard-hit. The multifamily sector, meanwhile, has held up better than expected, with 87.7 percent of renters making a full or partial rent payment the week of May 13, according to the National Multi Housing Council’s survey of owners/managers of 11.4 million apartments.
Although the uncertainty caused by COVID-19 has dampened economic momentum, there are still lenders that remain active in the capital markets. Local, regional and national banks, credit unions and life companies are funding deals in various asset classes, though the credit box is shrinking. They are working with stronger sponsors who have excellent credit, pulling back on leverage and requiring higher debt service coverages, which corresponds to higher debt yields. However, even borrowers who can meet those criteria face unique obstacles in getting to the closing table.
Process has become critical, and even the smallest missteps can derail a deal. Borrowers need to navigate a range of unexpected new hurdles, such as finding ways to safely and effectively manage the appraisal process or coordinate third-party inspections. Lenders are dealing with tremendous pressure on bandwidth and resources as they weigh exposure in their existing loan portfolios, manage workouts and administer the Paycheck Protection Program. As a result, it’s crucial to package and present appropriate documentation such as rent rolls, expenses, profit and loss statements, tax returns and third-party reports in a comprehensive and compelling manner to minimize objections.