Capital Markets: Debt Is Out There, But Lenders Remain Cautious
Commercial real estate investors and developers venturing into the market for financing are likely to find lenders offering less debt and forcing lower leveraged deals in today's risk-averse environment.
"There seems to be less debt," Avison Young principal and Altera Development principal Mike Kennedy said while speaking at Bisnow's Capital Markets webinar last week.
"We closed on a medical office building property in Houston that has cash flowing and some vacancies ... [it has] some upside and good quality leases and an opportunity to develop a parcel. The amount of debt we were able to get on it was substantially less than we might have gotten a year ago or four months ago."
Kennedy said real estate debt is definitely available, but it makes up less of the capital stack.
Lenders, in general, have turned risk-averse, and are having difficulty obtaining the most accurate underwriting prognosis with real estate valuations in flux as the coronavirus pandemic disrupts building cash flow and the long-term leasing outlook of a property.
"We are in a place in our country and world where things happen really quickly and information travels fast, so we had a very quick knee-jerk reaction and everybody hit the pause button on the debt and equity side; and it all became about risk tolerance," Cushman & Wakefield Executive Managing Director Beth Lambert said.
Lambert said banks initially stalled on the lending side and took some time to reassess their portfolios to protect existing collateral. They still want to deploy capital, she said, but doing so is much more difficult in today's environment where building value is harder to assess.
While all asset classes have been hit, industrial and multifamily remain the bread-and-butter categories that outperform all others, the panel members noted.
Even still, the government-sponsored enterprises, Fannie Mae and Freddie Mac, have adjusted their own risk profiles when underwriting multifamily deals, NorthMarq's Suzanne Jones said.
Jones credits the agencies for providing liquidity to multifamily during the market disruption but notes the GSEs started requiring more debt service reserves and pulled back somewhat on lease-up deals and senior housing.
"Investment sales once COVID came out pretty much halted," she said. "We are now starting to see it slowly starting to come back. A lot of investors took a wait-and-see approach with the debt service reserves."
The office category is another mystery since it's still unknown whether people will return to work or whether more companies will establish remote positions, CBRE Vice Chairman Russell Ingrum said.
"Until there is a vaccine and the fear is taken away, no one knows how they are going to use office space," he added.
Ingrum said companies could reduce their office footprints altogether as more people work from home, while other firms may still lease space and expand their footprints to deal with densification and social distancing concerns.
The one thing investors and developers need to know is that new relationships with banks are nearly impossible to forge in today's environment, and the most viable CRE deals are the ones stakeholders bring to banks where they already have established relationships.
"There are a lot of those groups that are just not venturing outside of their relationships," Lambert said of lenders. "If it's a new relationship, it doesn't matter how good the real estate is or how good the borrower is. They are just not looking outside of that [established relationship]."
CORRECTION, July 21, 8:39 AM. CT: A previous version of this story provided an incorrect title for Mike Kennedy of Avison Young and Altera Development. The story has been updated.
