Where Are CRE Capital Dollars Flowing In The Wake Of The Pandemic?

Prior to the coronavirus pandemic, capital markets were flush with cash as financial institutions searched for opportunities to deploy funds into commercial real estate plays.

That all changed on a dime, as the coronavirus shutdown spread fear and uncertainty throughout the buyer and seller markets. Lending institutions are still looking to deploy debt and equity, but they are becoming much more selective when it comes to underwriting deals and CRE product types.

“What we are seeing from investors right now is a barbell approach,” Transwestern Executive Managing Partner Steve Pumper said while speaking at Bisnow's "Where is the Money Flowing?" webinar.

“So you are seeing a flight to quality in the best of the best for the 'core' [products] among buyers. They buy these assets and ride out the storm even though some of their tenants may be delinquent on some of their payments,” Pumper said. “They still have capital, and they want to place it in the markets.”

When it comes to skin in the game, Younger Partners’ Scot Farber sees sources of capital still offering some runway for deals that need financing, but borrowers are not necessarily benefiting from pre-crisis underwriting guidelines. 

“If you are an existing customer for a bank and they are comfortable with you and your collateral, then I think there is a good opportunity for you to be refinanced,” Farber said. “I think the loan-to-value ratio that they are going to have will be reduced.”

Farber already sees capital providers taking bold steps to stay ahead of maturing commercial property debts, particularly with the government encouraging parties to make these loans work without too much market disruption.

“There's a huge amount of upcoming loan maturities out there ... [from] CMBS maturities to debt maturities,” Farber said. “But a lot of the banks and life companies, even if the loan was coming up or even if it was current, a lot of them already received modifications.”

Even the retail space has some liquidity.

“They are still loaning on very solid multi-tenant [retail] deals if all of the tenants are open for business and certainly on the single-tenant stuff that’s open for business,” STRIVE Managing Partner Jennifer Pierson said. “Debt isn’t readily available, but certainly available for those transactions.”

But this asset class entered the crisis while already struggling against e-commerce and a changing retail landscape, and Pierson said she has heard of some strategic discussions where retail owners are having to weigh the pros and cons of keeping their shopping centers or assets going long-term or simply walking away now. 

“I’m thinking for retail, it wouldn’t surprise me if it was a couple of years [for recovery] because everybody I talk to is saying I own 20 shopping centers, I own all of these properties, and I have a choice this month to [either] feed the loan or default the loan,” Pierson said. 

“Do I keep this afloat with my own equity, or do I just say I’m out, and I will trigger a default? I’m not going to deplete my savings to hold on. It’s really that kind of dire right now.”