Frequently Asked Lending Questions During the COVID-19 Pandemic
These unprecedented times have many of Slatt Capital’s clients asking questions to help them understand where things stand in the lending market. We have compiled some of the most common questions we’ve been hearing and wanted to share the answers here:
1. Is there any liquidity in the market for commercial real estate financing?
The short answer is yes. All major property types are financeable, although hospitality properties are the most challenging, followed by retail since these properties have been most impacted by COVID. Even so, our firm funded a hotel loan just this week, and we continue to have success closing and sourcing new retail loans. Lenders are being much more conservative in underwriting retail and have required verification that retail tenants are open for business and paying rent. Additionally, many lenders are choosier with any degree of cash-out requests, even on low or moderately leveraged loans.
2. Are all major categories of lenders actively lending?
Yes, all major lender types are active in the market, but at very different levels than existed pre-COVID. The market has shifted into a more lender-driven atmosphere, and there is a clear divergence in how the various capital sources compare and where they are most competitive.
Most insurance companies are actively lending. They are taking a conservative approach to underwriting, because they generally hold loans on their books as long-term investments. Ten-year fixed-rates range from 3.0% to 4.5%. Some were a bit distracted with COVID-related loan relief requests, but most are now back looking for deals, as they still have allocations that need to get out by year-end.
Many banks are still lending, but they are also using much more conservative underwriting requirements. We are fielding many calls from borrowers seeking help with financing, as their existing banking relationship either changed their program or no longer offers a reliable execution. Fewer banks are offering construction and bridge loans, as they carry a greater perceived risk than loans on stabilized assets.
The market for agency debt has remained liquid throughout the COVID-19 pandemic, with an added appetite for workforce housing. Many new agency loans have specific reserve holdbacks to deal with short-term collections due to COVID but have some of the most aggressive rates, ranging from 2.75% to 4.00%.
The CMBS market froze in early March as a result of the COVID-19–induced financial market meltdown. Since then, CMBS lenders have started to creep back into the market, and there are encouraging signs, with new and upcoming conduit offerings pricing within predicted spreads. CMBS shops are avoiding hotel and retail, however, as these asset classes have fared the worst in recent CMBS delinquencies.
3. Are all lenders taking funded reserves for tenant improvements, leasing commissions, taxes, insurance, and principal and interest payments?
No, not all lenders are taking reserves. The reserve structure in a loan really depends on the type of loan as well as the lender type. Many loans are being made without reserves at all, but many lenders are now using reserves, which are much more common than in the pre-COVID era. Every reserve structure, if required, is a deal-by-deal negotiation.
4. Where should I expect my rate to be?
Rates for most loans are in the 3.05–4.5% range.
5. With “stay at home” orders still in place in most states, is it taking longer to get quotes and close loans?
Yes, it is generally taking a bit longer to get quotes and close loans. Choosing the right lender to provide certainty of execution and handle the unexpected is critically important. Having an experienced closing team that can get out in front of problems and creatively solve issues also helps.
Our Slatt Capital platform is engaged with a diverse lender network and real-time market intelligence that is a critical advantage in this fast-changing COVID landscape. It is critically important for borrowers to work with a fiduciary who has a strong lender network and relationships to help solve any problems that arise. It is now a lender-driven market.
If you have borrowing/lending questions that are not covered in this shortlist, all of Slatt Capital’s commercial mortgage bankers are available and working hard to assist you and meet your needs.