Everything has changed over the past seven months. Words like quarantine and social distancing—all unfamiliar just in February—have become a regular part of conversations. Everyone is using the term new normal to describe everything, from dining out to public transport. And if you are a CRE investor or are thinking of becoming one, you may be wondering: How does this new normal apply to commercial real estate lending? What does the industry’s new reality look like?
It’s the age of interest rates at historic lows. The government is doing all it can to stimulate economic activity through various handouts. With all of this assistance, you would expect commercial mortgage lenders to open for business and actively make new loans at affordable rates. But this is not happening.
Here’s the reality: Economic uncertainties are causing rates to fluctuate. Commercial loan activity and volume have decreased, and underwriting requirements are more stringent than ever.
Reduced LTV ratios have become the norm for loans that get financed. The result is an increase in the capital stack gap—and therefore, the equity developers/investors have to put into deals, ultimately compressing returns.
Repositions and ground-up constructions are the hardest hit. And while raising additional preferred equity and using mezzanine financing can plug the holes, these options are expensive.
Some experts are even going as far as to say that there is no such thing as usual. The initial optimism about getting back to some normalcy level in the commercial property lending space has diminished, as no one knows what normal will look like.
Reflecting this trend are CRE crowdfunding platforms that cater to borrowers who need access to capital and private investors looking for opportunities. When the pandemic hit the US in mid-March, these platforms saw a complete 60-day shutdown in private lending activity. Larger lenders have been able to return to market since, but smaller lenders—which account for 50% of the private lending market—have not been able to bounce back up. They’ve been relegated as COVID casualties.
The number of overall active lenders has also shrunk considerably, so there is much less competition. This is causing the negotiation power to shift from borrowers back into the favor of the lenders. The era of borrowers having the lay of the land and getting better terms is over. Market conditions have dramatically changed.
The result? Lenders are choosy, terms are more conservative, and prices are higher as the pandemic rages on.
Lenders that can afford to get back in the game offer pricing that’s 100 to 300 basis points higher compared to pre-COVID levels, as well as lower loan-to-value ratios. They also require higher credit scores.
Are There Still Opportunities in Commercial Real Estate?
A lot of what will happen going forward depends on how fast the US economy can recover—which is ultimately dependent on whether a COVID-19 vaccine will be developed and whether the number of overall cases spikes or declines over time.
Whether or not one can profit from this uncertainty depends on the type of investor they are.
Unexpected events always distrust market cycles, but investors who actively keep their eyes on opportunities can benefit from the panic. The difference between seasoned investors and hobby-investors becomes obvious during times like this. They react very differently to the challenges that this public health crisis brings to the commercial real estate industry.
Hobby investors typically wait on the sidelines because they don’t have the same access and history with contractors and financial partners that seasoned investors enjoy. Meanwhile, veteran developers and investors see opportunities in all this uncertainty, even though financing is harder to obtain. There’s still a lot of borrowing demand from seasoned CRE players, and experienced investors still have an appetite for reliable deals.
Learning to Think Long Term
Many industry experts believe that the government stimulus is creating an inflationary environment—investors who want to succeed need to look beyond the next two to three years. There is still potential for property values to double—perhaps even triple in value—over the long term.
When fear subsides, more lenders will likely slide right back into the game. But they’re adjusting and cautiously waiting like everyone else in the meantime. Those who want to obtain financing for their CRE projects have to adjust to stricter lending guidelines.
Experts also caution against emotional selling during this time, saying that it is often the worst decision an investor can make during times of uncertainty. The key is to stay calm and create a detailed, realistic investment strategy. It’s the only way to fare better in these choppy waters.
Working with a Commercial Mortgage Broker
Do you have a CRE project that you want to fund during this time? An experienced team of commercial property loan advisors or brokers can help you out. Contact us here at Capital Investors Direct.
Tell our team about your project today. We can work with you through this pandemic’s unique funding obstacles to ensure the best outcome. Do you need a bridge loan to ensure your project’s continuity? We help borrowers find reasonable short-term financing for rehabilitation, repositioning, and value-add opportunities for commercial real estate assets costing between $100,000 to $5,000,000.
We also offer asset-based hard money loans using an efficient underwriting process to give you the financing you need in just ten days. We also offer stated income loans as well as investment property loans at quick timelines. Contact us to talk about opportunities.