KeyBank Leaders Weigh In on Lending in COVID-19 Era

By Dennis Kaiser

The real estate markets are working through the disruptions caused to the economy by the COVID-19 pandemic. The unexpected halt to what was otherwise shaping up to be another strong year caused companies to explore new paths as they forge ahead in 2020. And it has been encouraging to see the progress being made and the promising results, despite the challenges faced.

Connect Media polled lenders from across the country at KeyBank to find out how markets are faring in their areas, where demand is coming from, how financing is getting executed and the ways the coronavirus pandemic has impacted lending. Check out the insights in the CRE Q&A below from KeyBank’s Tabare Borbon, Vice President, Senior Mortgage Banker in New York; Katie Plett, Vice President, Senior Mortgage Banker in Seattle; and Robert Likes, National Director, KeyBank Community Development Lending & Investment (CDLI).

Q: What markets are hot in your area and what is driving activity?
KeyBank’s Tabare Borbon: There are no new hot markets in the northeast. The NY Tri-State area continues to see significant activity, but primarily in the affordable multifamily sector. In fact, a couple of high-profile NYC conventional real estate firms have started affordable housing divisions and made some high-profile hires of Affordable Housing veterans to run them.

KeyBank’s Katie Plett: In surveying clients based in the Pacific Northwest, we have not yet heard of a shift in new or different markets that are now “hotter” or less “hot” than pre-Covid. The west coastal cities, plus Phoenix, Denver, Nashville, etc. are still “hot.” There was a pause in deals transacting earlier in the summer, but deal flow seems to have picked up over the last 30 days. Obviously, urban office and retail have taken a major hit and urban multifamily properties in lease-up have experienced a major slowdown in absorption along with a drop in leased rents. It will be interesting to see if the flight to the suburbs or to more lifestyle communities will stick; or once the pandemic is under control, if people will revert to more of a pre-Covid lifestyle.

Q: What property types are in demand and why?
Borbon: Affordable Multifamily is in the highest demand right now. This sector has been the least affected by what has been occurring the last few months. Conventional multifamily is down with rents declining and vacancy and inventory more than doubling in Manhattan for example.

Plett: Multifamily and industrial are in demand. Multifamily remains strong due to the national housing shortage that still exists. People always need a place to live. If anything, there is a slight shift away from Class A downtown properties to larger unit sizes that are more affordable. Industrial, especially distribution type buildings, are in huge demand due to supply chain needs and the “Amazon” effect.

KeyBank’s CDLI Rob Likes: There is a need for seniors affordable housing all across America. Regions, both urban and rural, that have historically been targeted as retirement destinations will continue to see demand outweigh supply. As our population ages, there are fewer affordable choices for seniors. Private facilities tend to be unaffordable, so people tend to age in place, which in a lot of cases is not the best or safest choice. There needs to be continued industry-wide focus on both creating new options for affordable seniors as well as preserving and improving existing housing availability that is at risk from deterioration in quality or transition to market rate housing. The current strain on the economy risks creating further challenges to low income family living situations, forcing younger to middle age households into elderly parent households and vice versa, causing even more issues around affordability of living independently.

Q: What types of financing is available for investors now?
Borbon: Primarily, GSE and FHA are the most prevalent types of financing available. There are some balance sheet players, but primarily only for strong relationship clients, and at higher rates than we’ve seen historically.

Plett: The GSE’s are a key source of financing now. Government backed lending is pricing extremely low and generally offers the most proceeds and competitive terms.
Life Insurance Companies are lending on lower leveraged multifamily and industrial assets. Meanwhile, we’re seeing limited balance sheet lending. Most banks are still lending to their existing clients on a more conservative level than previous. Retail, hospitality and office are tough to finance right now.

Likes: Capital for seniors, multifamily acquisition and development and preservation continues to be available, though lenders are being cautious. Public/private partnerships must continue to be leveraged with capital such as tax-exempt bonds or equity funds and agency products such as Fannie Mae, Freddie Mac or HUD continuing to provide ready capital to ensure affordable housing is developed and preserved for the future.

Q: What do borrowers need to consider now versus before the pandemic?
Borbon: Borrowers definitely need to understand their tenant profile, and if they have subsidies, the rules around those subsidies. Tenant portions of Section 8 properties have been affected, and borrowers need to understand the rules around raising the HAP contract levels as a result. In addition, since Class A properties are having a more difficult time renting units, affordable borrowers need to be cognizant as to how that may lead tenants into those developments due to better amenity packages.

Plett: Borrowers need to understand their tenant profiles and not only what is happening to their operations now, but what might happen in six months or next year. Banks are pricing in risk and are no longer lending to pre-Covid terms.

For multifamily properties with tenants who are currently paying rent, considerations include: who do they work for? will they be laid off or are they waiting for unemployment?

If a borrower has commercial tenants – even if they have a lease in place – they need to determine what the viability of that business is going forward? Is the lease guaranteed? What is the financial strength of the guarantee?

Likes: From a financing perspective, capital has become more expensive. Tax credit pricing in the LIHTC space has declined significantly and there hasn’t been a corresponding increase in soft sources to fill the gaps. Capital stacks are becoming increasingly challenging to bring together and make work for investors to meet yield parameters. Additionally, deals generally are taking longer to close in the current economic climate.

From a real estate perspective, borrowers and owners are having to make many site adjustments due to the COVID environment. Seniors have been found to be of one of the most vulnerable populations for COVID-19 illness. Taking proper steps to ensure the safety of residents and allow for healthy living during the ongoing pandemic has changed the way developers have to think about how to keep residents safe and healthy. Partnerships developed for on-site or nearby care and overall health and wellness have become more critical. Tenant in-place rehabs, for example, are a significant challenge to get lenders and investors comfortable with during this time. Understanding the resident needs and unique circumstances prove critical to ensure the safety of the residents and confidence in the sponsor and management of the property.

Q: What has changed the most during this period of disruption and how do borrowers need to adjust?
Borbon: The GSE’s are more conservative, especially for non-subsidized housing, which includes reserves and also potentially lower leverage. In addition, tax credit equity prices have dropped and is harder to obtain. And finally, construction financing has become more difficult to obtain and when made available it is at less desirable terms than in the past.

Plett: Generally, the terms available are more conservative and additional scrutiny is given to operations, collections and the micro market of each project. In multifamily, we have not seen a major shift yet, but I expect renter demand to increase for larger sized units. And we will likely see additional amenities like flex workspace to accommodate remote work and learning from home now that they’ve become part of the typical experience for families.

Likes: For financing, overall pricing and terms have adjusted due to the economic climate. Development budgets and construction/lease-up timelines are being scrutinized and sensitized to ensure that enough buffer is built in to ensure delivery of a project is met. Banks, especially, are managing capital and risk with increased focus and adjusting their products accordingly. Borrowers need to think creatively with their investors and lenders while working with their state, county and local agencies that can bring the soft funding needed to fill the gaps to make affordable projects works. More subsidies are needed to continue to meet the demand to create and preserve affordable senior housing. Borrowers should also work to collaborate between resources available to seniors in forms of Medicare and Medicaid, as well as resources designed for the affordable population such as low-income housing tax credit and rental subsidies. Ongoing advocacy for affordability must continue in order to shape policy going forward to bring more resources to this population in need of more housing options.

On the real estate side, design needs have abruptly changed. Whether new developments or preservation of existing units, borrowers must consider spacing, cleaning activities, common space, activities, etc. in a different way than they did pre-pandemic. The balance between having seniors feel a sense of community with neighbors in their housing and keeping them safe and healthy is more challenging than ever.

For comments, questions or concerns, please contact Dennis Kaiser