From Ulmer’s Real Estate Advisor Law Blog
By Kristin W. Boose
On March 20, 2020, the CRE Finance Council hosted a great conference call entitled, “The Impact of COVID-19 on the Commercial and Multifamily Real Estate Property & Finance Markets.” Like many of us in the commercial real estate world, I’m anxious to get my arms around what impact, both short and long term, the COVID-19 pandemic will have on our real estate markets, including real estate finance, a focus of my practice. Spoiler alert – we don’t truly know. These experts provided us with their thoughts and observations, discussing both the lending and debt markets, including macroeconomic and microeconomic aspects. Here are important takeaways I learned concerning COVID-19’s impact on lending and the various real estate sectors:
- Commercial real estate loans substantially on their way to closing are likely to get done, unless of course the property or portfolio of properties that is the subject to finance is in an especially hard-hit area (e.g., hospitality) or the closing of the loan becomes administratively difficult (e.g., closing of recording offices). The speakers representing the bank lending side of the call indicated that they’d continue to scout lending opportunities, however, it seemed clear to me there’s a good chance pencils are down or are being slowed on new borrowings until the smoke clears on the COVID-19 crisis.
- April 1 will be the lending market’s first true dose of reality. Why? Because monthly loan payments are often due by borrowers on the first of the month or soon thereafter, and this will be the first payment date since COVID-19 really gripped our nation and economy. Part and parcel of those debt payments is whether tenants for tenanted properties (think multifamily, office, retail) can make, delay, or withhold their monthly rental payments. Rental payments are the life blood of these asset classes.
- The speakers then discussed the issues and challenges faced by certain real estate asset classes:
- All assets classes face the same central and crucial question: What is a property’s “true value”? Commercial real estate lenders lend on property value and property income. If these central tenants of lending can’t be realistically determined, quality lending decisions can’t be made. A main concern is just how long, wide, and deep COVID-19 will reach. Are we talking weeks or months or longer? Will a property’s value change as a result of COVID-19, and if so, just how far will that value fall? Where is bottom?
- All tenanted properties: The big question is how rental streams will be impacted, now and over time, depending on the length of the crisis and ability for the applicable sector to “bounce back.” Will tenants continue to pay rent, or will that rent stream be interrupted in some manner (abated, delayed, or stopped altogether)? On the multifamily side, people are likely staying put. People may be dealing with a situation where their lease has ended but is held-over due to some aspect of the COVID-19 situation (thereby decreasing turnover and/or new rentals) or situations where a landlord is restricted on or delays evicting a nonpaying tenant.
- Properties under construction: Properties under construction or renovation are facing work stoppages by their contractors and subs as well as supply chain shortages. In addition, I also have concern over the people and resources it takes to create and execute on all the various layers of completing construction loan draws. These present a whole host of issues to consider, including delay of construction, delayed payments, and delayed time to market.
- Industrial: Supply chain disruptions are causing tremendous issues for industrial sites, in addition to decreased workforces on sites.
- Office: I thought the speaker’s comments on the office property sector were interesting, which were – in so many words – what if this remote work gig works too well and employers actually find benefits to having a home workforce, in part or in whole? How would this impact the office market? This made me think about a conversation between my husband and our neighbor, both physicians. (No worries, the conversation was from across the street so social distance was respected!) They were comparing notes about how COVID-19 has caused their practices – almost overnight – to switch to telemedicine and “virtual visits.” Very few patients were walking in their doors this past week. They both feel this COVID-19 outbreak will dramatically shift the practice of medicine, making telemedicine and “virtual visits” more in the norm. If true, think about how this may impact need for medical office space.
- Student Housing: Similar to the remote work aspect of the office sector, a similar comment was made about the student housing sector. We’ve seen colleges and universities across the nation switch to online, offsite classes. Assuming this works well, could there be less need for student housing in the future?
- Hotel/Hospitality and Retail: These sectors are the most worrisome. We are now seeing and hearing in our daily news headlines that malls and retail stores are closing and travel is being discouraged and even restricted. The experts feel lending will halt entirely for these areas with exceptions for special situations.
Not surprisingly, banks and servicers are anticipating a rise in real estate assets going into special servicing (aka “workout”) in the future. I suppose the question is: will it be a wave or a tidal wave? Despite the gloom and doom feeling of late, there was good news. That good news is: the lessons of and the institutional changes resulting from the “Great Recession” (December 2008-June 2009) vastly improved our nation’s financial infrastructure. We are on solid (or at least much better) footing to weather this COVID-19 crisis. In addition, despite it being 10 years ago, the “Great Recession” is still a recent memory for many of us, and importantly, our financial industry leaders. As result, I am hopeful we have cool hands at the economic controls as we travel through these turbulent times.
The parting words on the call were an acknowledgment to meet back in a few weeks to reassess. At that time, we’ll have a better idea on the timeline and reach of the virus’ impact on our nation. We will know better how well we’ve prepared (and washed our hands, not touched our face, and kept our social distance, etc.). Until then, keep safe and wash those hands!