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Banks Not Eager To Ramp Up Lending As States Start Reopening

Since many parts of the country shut down in March, banks have drastically decreased the number of loans they are giving. Now, with some states already reopening — and New York eyeing next week to begin its phased reopening — it may still be a while before banks start lending anywhere near the scale they were before the crisis. 

“It’s just not going to turn on a dime,” Wells Fargo Head of Multifamily Capital Alan Wiener told Bisnow this week. ”I think that as things start to improve, you’re not going to turn a lightbulb on and be back to where you were in February or March. It’s just not going to happen.” 

As the shutdown approaches the two-month mark, some think May 15 may be a watershed moment that will provide a glimpse of the types of loans banks could back in the months and years to come. 

Up until now, banks have responded to Ariel Property Advisors Director of Capital Markets Matt Swerdlow's loan deal requests by asking to “kick the can down the road” a few weeks to buy time as they determine how the real estate market will play out in a post-pandemic world, he said.

By May 15, things may start to move for two reasons: Banks will have a better idea of what the market will look like as monthly payment rates come in and parts of the state will begin to reopen, Swerdlow said. 

While New York City will remain on pause for a while after that date, the motion offers a light at the end of the tunnel, Swerdlow said. 

“I think that the sentiment of progress would allow lenders to start considering deals,” he said. 

While they will know more about the state of the market as May rent and debt payment rates come in, banking executives said it will most likely still be a waiting game past May 15. 

“We’re going to have to just wait and see. We’ve never been through anything like this,” TD Bank Executive Vice President and Head of U.S. Commercial Real Estate Lending Gregg Gerken said. “It is pretty hard as a lender to underwrite a project when you don’t know what that rent roll will look like.” 

With the economy in flux, banks have come to a pause as they rethink where they are going to put their money. At the end of March, Trepp released a report that predicted an 8% increase in loan defaults across the board based on data from 12,500 loans owned by commercial banks. Trepp analysis showed that this loss would be most dramatic in the hospitality sector, with a 35% increase, followed by retail at 16%, with office, multifamily and industrial hovering under 5%. 

Swerdlow said it has been difficult to get a loan even on real estate faring best in the market right now. Banks aren't lending to new clients either. 

“I’d say you're starting to see business in general slowing down pretty dramatically,” Gerken said. “A lot of what we've been doing over the last two months has really just been working through the pipeline that existed pre-shelter in place. There was a fair amount of activity that was in that pipeline.”

Wells Fargo, which has also slowed signing onto any new loans, pledged to continue with any existing loans, Wiener said. Beyond that, he was more uncertain.

Loan deals that banks would bid on just months ago now barely get a single taker, indicating just how much bank lending has slowed, Swerdlow said. 

“If you had a cash-flowing, multifamily deal six months ago, I probably would have sent it to a dozen to 15 banks who would’ve been very competitive,” Swerdlow said. “Now, I have to send the same deal to over 40 lenders just because they’re paused … There is really no one hyper-active right now. No one is just really saying, ‘Hey, come to us, our doors are open.’” 

The only loans that banks are likely to take up are those taken out against existing projects, Gerken said. And while banks are being cited as a main hold-up to deals taking place, he said the lack of deal activity is also driving down lending activity.

“Debt usually follows the equity, so if you take a look at who is out there buying or transacting right now, I don’t think you’re going to find many people looking to do deals, primarily because they don’t know what a deal is going to look like tomorrow,” he said.

Eric Orenstein, an attorney in Rosenberg & Estis’ transactional department, said he is seeing pent-up demand for loans. Once people get physically back to work, he expects the faucet may turn on and deals may flow. 

“When people can get back to work, I think psychologically, you’re going to start to see transactions tick up,” he said. “I think right now, it is hard for people to take that leap. I think there is demand, and so I think that will be met once we can start opening up offices, once people can have some capacity in their offices.”

When lending does pick back up, capitalization rates will go up — a sign that the deals are seen as riskier. Orenstein said he is already seeing it: He has a client that signed a contract two weeks ago at a 5.5% capitalization rate. Before the crisis, it would have been trading at a 4%, he said. 

“I do think that is expected, because if we’re in the bottom of the last cycle,” he said. “I think the cap rates are going to have to go up in order to spur people to buy new stuff. People stopped buying because the cap rates weren’t so great.” 

What loans traditional lenders decide to back will reflect strengths in the market, Swerdlow said. 

Right now, the most in-demand asset class is multifamily with no commercial component, followed by industrial, office, retail and hospitality, he said. As time goes by and banks start lending again, he predicts that projects with high credit ratings or those with an essential service component will begin to be funded. 

“Those are the only two that are coming to mind as the only type of commercial that would be considered,” he said. “I am refinancing an office building in Queens right now, it’s fully occupied next to Elmhurst Hospital. But if that was a Midtown Manhattan office building where no one was going to work anymore, that’s going to be a whole different story. So there’s gotta be some type of essential service to it.”