KeyBank’s Justin Wilbur Breaks Down Texas CRE in COVID-19 Era

By KeyBank’s Justin Wilbur

Q: What are the biggest challenges the commercial real estate sector faces in the COVID-19 era as it relates to the financing KeyBank does?
A: Right now, we are in a portfolio management mode. We are focused on the multifamily sector in Central Texas for borrowers in Dallas, Houston, San Antonio and Austin. We’ve seen a few ups and downs lately and it clearly is a different landscape from Q1. We’re seeing some positive signs, with the stock market rally, job growth and the resiliency of the multifamily sector.

There are a number of challenges with potential long-term impacts. There’s been mixed news of late about unemployment claims dropping, perhaps as a result of the stimulus efforts. Working from home is one of the biggest questions the industry faces to determine what impact that will have on the general office space. Companies may have to change their approach of trying to fit more people into smaller spaces and assume a different strategy to achieve less density in workplaces because of health guidelines or they may simply have to downsize. All of that impacts our lending capabilities. Where there is oversupply in some markets it will bring negative impacts.

Another big concern is due to reduced travel, there could be lower hotel demand, especially for properties that catered to business travelers. On the retail front, we’ve already seen retailers and small businesses close as a result of COVID-19 and that is likely to continue given the heavy debt loads companies carried pre-COVID-19.

Rents will face downward pressure especially for restaurants that need to create smaller dining areas and have fewer customers. Those factors reduce lending capabilities and our focus changed because of how COVID-19 has impacted sectors. That has caused us to focus on multifamily assets given the struggles facing other property types.

Q: What do you see ahead for the commercial real estate finance industry?
A: I think we’re in a wait and see scenario. Transaction volumes will remain down until the country regains a firm footing as it pertains to the pandemic, which will likely carry over into 2021. All property types are impacted, though retail, hotel and office more so than multifamily or industrial. We’ll need to track foreclosures and rethink workspace densities. Those are what we need to be mindful of when we look at lending capacity.

Commercial real estate in Texas was in good shape before COVID-19 hit, with growth occurring in most markets across the state. As an industry we’ll be more conservative, yet understand it is not a real estate issue causing the problem. Hopefully we’ll bounce back when the pandemic is behind us. We all recognize there are headwinds, though Texas has fared better than other states. We will continue to work with clients to help them succeed and find ways to guide their portfolios through this crisis.

Q: What advice do you have to navigate the challenges as the COVID-19 situation evolves?
A: Even though we must be more mindful of risk in this cycle, it is still going to take a more conservative approach to get through this challenge. That means less leverage with the LIBOR pressure to go down, and spreads will widen out a bit. We might see more recourse on bank deals until we know more and can place full confidence behind a borrower and the transaction.

We have adopted a more conservative approach and we’re in a portfolio management mode. New deals will still get done but we’ll put our best foot forward. We now like to see a borrower take an active investment in deals to show confidence in deals, mainly in the form of a little recourse or deposits with banks.

Q: How are market fundamentals shifting and how should the industry adjust to prepare for what’s next?
A: There are different fundamentals emerging across different asset classes. That will impact how things play out in this cycle and drive a more conservative approach. The hit to some property types is being felt harder than others. The hospitality, office and retail sectors are experiencing downward pressures. We have been pleasantly surprised by the collection rate for industrial and multifamily properties. Monthly collections for Class A to workforce assets have exceeded 90%. Multifamily collections were 90 to 100% across our portfolio, which was pleasant to see. The stimulus and CARES Act have obviously helped, and we’ll continue to focus on sectors where we see stronger fundamentals compared other property types.

Q: What should borrowers be doing to prepare should the recovery take longer?
A: The initial consideration for us is to look where there’s strong fundamentals and safer opportunities. That is causing us to make a run at industrial or multifamily deals. We look for good locations and upside, especially in markets that have weathered the storm better. Leverage is a key issue and doing full to 75% levered deals are less significant today until we get better footing and see the full picture. Across the board, we’re seeing less leverage.

On retail deals, we’ll look to see if they are considering grocery-anchored properties with tenants that have shown an e-commerce component or a strong profile that can weather the storm.

There are many unknows to consider, and that’s causing us to be more cautious on new office and hospitality transactions. It will be more difficult to get those deals done. We’ll need to see the market statistics. Ultimately, we want to see the economy open back up near full capacity from where we’re currently at.

Retail and hospitality sectors were hurt significantly, because people couldn’t travel or shop simply because they couldn’t get out. Now as markets open up in varying degrees across the nation, we’re starting to see more normal day-to-day activity. We want to see unemployment go down and will take a close look at month-over-month retail sales compared to previous years. It is going to take a while before we’re comfortable with retail and hospitality deals and those deals will see leverage levels lower than in pre-COVID-19 times.

The Texas market is our immediate focus from a portfolio management perspective. We are seeing more lending opportunities and continue to focus on multifamily mainly. There are still strong development markets in Texas specifically, with job and economic growth present. There are acquisition opportunities for stabilized, new build to value-add renovation deals. We remain focused on opportunities to provide value to clients and deliver benefits our existing portfolio.

For comments, questions or concerns, please contact Dennis Kaiser