Signs of credit

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The commercial real estate world stands united in our gratitude to essential workers and first responders as they help the Garden State weather this dreadful pandemic. And while nothing surpasses the importance of their efforts these days, our work continues, too.

One question that frequently arises about our work today is: Who’s doing the lending in this difficult environment? Are traditional banks still providing financing? Or must borrowers now turn to such higher-priced, alternative sources as hedge funds, traditional bridge lenders and family offices?

Well, traditional banks are still lending, but terms tend to vary by asset category. Banks offer excellent rates and products on stabilized multi-family transactions. Similarly, stabilized self-storage and stabilized industrial properties are being offered highly competitive deals on permanent financing.
But banks have taken steps to minimize risk in some asset categories by demanding lower leverage points. For example, when it comes to retail and office assets, banks today look for leverage of 60 percent to 65 percent, rather than the 75 percent they’d been comfortable with during normal times.

Unsurprisingly, commercial borrowers can expect to pay more than conventional rates when securing alternative financing. While banks may charge points valued at one percent, for instance, an alternative lender may require 3 percent.

And we’re seeing lenders, across the board, spend more time scrutinizing prospective borrowers. It’s also hard to find any lenders willing to take a chance on a first-time borrower– or one with a very short-term borrowing history.

Alternative lenders are financing projects that add value to an asset, such as the upgrading of a class-C- property to class-B level. Interest rates are higher than those usually offered by banks, but borrowers benefit from good leverage. Our company has seen quotes that cover 75 percent of the purchase price and 100 percent of renovation costs, proportions that will almost never be offered by a traditional bank in today’s environment.

Another big trend among alternative lenders is to finance the conversion of sub-performing hotels into multi-family properties, a category not being handled by traditional banks right now.

For example, my office is presently working with a 130-key hotel – part of a prominent, national chain – in central New Jersey. The venue, now standing at paltry 15 percent occupancy, is located, however, in a spot that’s superb for residential development, with ample transit, dining and shopping all close by.

So, connecting the dots, the hotel owner is now scouting out financing to convert the property into an apartment building. And while no local banks have been responsive, we’ve attracted expressions of interest from a number of private funds.

Despite pressures one might expect to see triggered by the troubled jobs picture, we are not witnessing much softening in the industrial sector or in the bulk of the apartment sector. This may be attributable to the palliative of federal stimulus programs. The office, retail and hospitality sectors, however, have generally been taking a bruising.

The multifamily space is experiencing some softening in secondary and tertiary markets surrounding America’s major cities. Increasing numbers of suburban properties that might have historically been purchased at a cap rate of five might now be at the six level. This figure will eventually return to five, but that’s still off in the future.

Many urban residential tenants have staged a pandemic-induced exodus from their units. City living makes less sense right now than it did last December. Dining and entertainment options have become limited. People aren’t comfortable living out their day-to-day existence amid today’s dense, urban conditions, nervously steering clear of bathrooms and elevators. And many parents are concerned about their children’s health in these settings.

But apartment-dwellers who are leaving are by and large still paying their rent, according to the most-recent data from the National Multifamily Housing Council. So while physical occupancy is down, multi-family owners are still doing fine – at least on paper. But will people still be able to pay their rent once the stimulus stops?

A number of commercial brokers are taking steps to ease some of the stresses faced by owners in today’s challenging financing environment. Our firm, for example, has changed its fee for refinancing mortgages with Fannie Mae and Freddie Mac – i.e., “agency refinancings” – from the standard one percent to a quarter-percent.

Looking to the foreseeable future, we can count upon the multifamily sector to do well, if only because people have to live somewhere. Self-storage should remain healthy, and – with giants like Amazon, Walmart and Target building distribution centers in one location after another – the industrial space should also keep humming.

Like with every recession, we’ll eventually get through this. The big question now is, what will it take for retail, tourism and travel to come back?

Right now, we’re stuck in a paralysis. Hotels have open doors and empty rooms. Highways are packed with cars because no one’s flying. But what will trigger a resolution? Will it be herd immunity? Will it be a vaccine?

Until this resolution occurs, owners and investors will need to adjust themselves to the short-term pain of lenders’ new normal during this pandemic period.

Marc Tropp is senior managing director at Eastern Union.