State of the Commercial Lending Market - May 2020

by Jeff Shindler, MRED

Evergreen Capital

The last six weeks have been challenging and unsettling for everyone. The shock and uncertainty that COVID-19 brought to the U.S. economy leaves us unsure of what comes next, and what moves to make in real estate and financing, if any. While the initial weeks of the pandemic saw lenders react by raising interest rates by as much as a full percentage point, we are now seeing settling and some stability return to the lending market.

What does this mean for investors in the near term? What are the upsides and downsides of transacting or refinancing in today’s market?

Here are some observations and thoughts:

Lenders are currently lending and rates are near historic lows.

Despite some devastating blows to the economy and skyrocketing unemployment, lenders remain well-capitalized and are eager to lend, particularly on multi-family assets. For owners or investors who are not focused on maximizing loan proceeds, the current lending environment offers some great opportunities to lock in very low interest debt. Commercial and mixed-use properties can be a challenge due to low economic occupancy, but properties with >80% residential income are still able to get attractive financing.

As collections become an issue, loan proceeds have gone down.

While it was possible to get 80/20 LTV financing two months ago, many lenders have pulled financing back to the 65-70% range. Cash-out limits have decreased as well, except in the case of HUD loans. Retail and office income in mixed-use buildings is often disregarded in the underwriting process, amplifying debt service coverage restraints. That said, mixed-use properties can still be underwritten at very low rates, provided high leverage or a large cash-out are not priorities.

Renters will be unlikely to be able to absorb rent increases for the foreseeable future.

Property owners should think about restructuring their multi-family portfolios to maximize cash flows. We may see some decrease in rents in the second half of 2020, and little-to-no rent increases in 2021 due to renters’ inability to meet their rental obligations. Many owners are now looking to decrease costs in order to absorb higher vacancy rates. Refinancing at low rates to lower mortgage payments is one of the most effective ways to maximize cash flow and protect assets during a prolonged economic recession.

Lenders are asking for mortgage reserves.

In order to offset the collection risk, lenders are now asking for mortgage and tax “set-asides”, with the length of time tied to loan proceeds. We are currently seeing 6-12 month reserve account requirements, with requirements up to 18 months for LTVs of 75% or more. Some of these reserves may be reduced or waived as the market stabilizes, but for now, borrowers should prepare for reserve requirements when making acquisitions or refinancing.

HUD loans are still a great option.

HUD lending is currently full-steam ahead. While HUD loans also require reserves, these may be waived in as little as six months. Additionally, HUD loans are one of the few lending options that currently have no limits on cash outs. While these loans take more due diligence and longer to underwrite, there is simply no cheaper debt available in the market, and this financing is a great fit for longer term holds. Borrowers with shorter funding timelines can take advantage of attractive bridge-to-HUD combo loan programs.

Contact us at Evergreen Capital for a complimentary review of your commercial real estate portfolio and advice on your best approach to taking advantage of these great opportunities.

Jeff Shindler is a Vice President of Commercial Loan Originations at Evergreen Capital and a commercial real estate investor and developer in the Pacific Northwest. You can find him on LinkedIn here.