CRE Lenders Shift Focus to Risk Management
Commercial property sales transaction activity has dropped off in 2020, to the tune of a 46% year-over-year reduction in dollar volume and 37% fewer transactions as of July. Is capital losing interest in the sector? No—far from it, says Reonomy in a new report.
“While sidelined cash equity for commercial property is at all-time highs, lenders have become more concerned with the current environment and future prospects for commercial property,” according to the report. “The importance of debt financing in commercial property markets cannot be understated and has major implications on transaction trends and price discovery. As a result, current lending trends suggest that market activity may remain subdued for quarters to come.”
While stores of dry powder may be at peak levels, interest rates remain historically low. In the past, lower rates have coincided with increased market activity in commercial property and greater price discovery, the report states. However, “availability of credit is not high as lenders shift focus from origination to risk management within their existing book. Lenders are tightening underwriting standards across the board for their loan products.”
As the Federal Reserve’s most recent Senior Loan Officer Opinion Survey shows, “a significant majority of lenders are tightening standards for corporate borrowers large and small,” Reonomy reports.
For loans backed by commercial properties, lenders are tightening standards for construction loans and non-multifamily assets “even more than they are for loans to businesses,” the report states. “While there appears to be less tightening for multifamily loans relative to other commercial property types, the majority of lenders still expressed greater conservatism going forward.”
For the borrower, Reonomy sees “a number of implications” in current trends. “The fact that lenders are tightening standards suggests that if you are looking to refinance or secure debt financing for a property, property operating and performance history is likely more important than ever.
“One can expect to see lower LTVs, higher DSCRs, fewer exceptions granted, more conditions, and overall less borrower flexibility,” the report states. Smaller lenders (e.g., community banks, non-bank lenders) may provide greater flexibility in negotiable loan terms.”
For comments, questions or concerns, please contact Paul Bubny
- ◦Financing
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