September 2020: Commercial Real Estate Update
By Michael Taylor, Gantry Principal, Seattle
The commercial real estate financing market is experiencing a period of adjustment as lenders formulate their investment strategies to navigate the disruptions caused by the coronavirus pandemic. Gantry has been closely tracking lender sentiment and during the first 60 to 90 days of the COVID-19 lockdown, the majority of lenders paused new loan quotes. Their reasoning was they needed to gain a better handle on the dynamic shifts occurring in the market.
It was a relief to see that over the ensuing summer months, most lenders resumed activities, albeit at a tempered pace. It was natural and expected that as they began dipping their toes back into the market, they’d adopt a prudent and cautious lending strategy. Among the adjustments that lenders made were to take a more conservative approach regarding leverage, as well as to be more selective on property types.
Lenders have placed industrial, multifamily and self-storage properties at the top of their priority list, while retail and office assets have less favor with lenders, unless the property features a ‘bullet proof’ rent roll, lower leverage and has strong sponsorship. On the other hand, hotel and hospitality-related properties are nearly impossible to finance at the moment.
Let’s not forget the interest rate environment we are in though. Given the market disruption and economic chaos it can be easy to overlook the fact that interest rates are at all-time lows allowing many low leverage deals to get financed at rates in the mid 2% range for a 10-year term.
As we look ahead, funding into 2021 promises to be interesting, yet with glimmers of hope to be found on the horizon. Typically, lenders look to begin filling their future funding pipelines following Labor Day. It is a period in which lenders start to quote aggressively on loans that will fund in the upcoming year. It is a pattern Gantry expects to continue as the year heads into the final quarter. That bodes well for borrowers, but especially for those with any loan maturing or that can be prepaid in the first half of 2021. That’s one reason Gantry believes now could be a prime time to explore financing options.