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Lenders Are Looking For CRE Customers Despite Pandemic

Wrightwood Financial CEO Bruce Cohen, Post Brothers Apartments President Matt Pestronk and Cortland Senior Managing Director Ned Stiker

Investors in commercial real estate can take some comfort in knowing that the U.S. banking sector is in better shape now than during the Great Recession more than a decade ago.

But though credit is available to developers, the terms are worse than they were a month ago because of the COVID-19 pandemic, according to a well-known Philadelphia developer.

"The COVID crisis happened when there were very low interest rates that corresponded to very healthy balance sheets across the regulated banking world," Post Brothers Apartments President Matt Pestronk said during Bisnow's April 2 webinar, Impact of COVID-19 on Philly & the CRE Market. "The regulated financial institutions that are at the center and are systematically important are fine. Are they providing leverage to counterparties that are not regulated that might prove excessive? Maybe."

Pestronk, who co-founded Philadelphia-based Post Brothers Apartments with his brother Michael Pestronk in 2006, notes that lenders want to lend money to developers. However, developers face a myriad of obstacles in getting projects financed, such as getting appraisals done and closing deals.

Construction financing, even under the best of market conditions, is considered by banks to be risky. Valuations of commercial property are also likely taking a hit in the pandemic's wake. Not surprisingly, firms aren't in the mood to make deals.

Pestronk urges developers to proceed with caution.

"Many purchases of cash-flowing properties were underwritten with 3% debt, and now rates are higher, so those purchases don't pencil out anymore, and buyers are faced with losing firm deposits or making an unprofitable investment," Pestronk said in an email after the event. "The next eight to 12 weeks will likely not be a period intelligently spent in search of construction financing."

Post Brothers President Matt Pestronk at home with his family.

Like other market participants, Pestronk remains bullish on commercial real estate over the long run thanks to the Federal Reserve's decision to cut interest rates to near-zero to stimulate the economy during the crisis.

"The only 'new normal' in my opinion will be that long-term interest rates — when the economy stabilizes — will be lower than we have seen in our lifetimes. That is massively positive for real estate," he said. 

Furthermore, Pestronk is confident that the naysayers will be proven wrong.

"Like always, the market will loosen, and academic predictions of 'things have changed forever' will prove as they have in the past: the prognostications of observers relegated to the practitioners' cat's litter box." 

Investors will also have to adjust to changing market conditions.

According to Pestronk, large publicly traded asset managers such as Blackstone will own more private real estate through non-traded real estate investment trusts than the largest REITs in each sector. They will provide investors exposure to higher dividend-paying vehicles than they could get from publicly traded funds.