Gallagher have been investigating the specific impact of COVID-19 on commercial real estate lenders and what the “new normal” looks like.
Pre-March 2020 commercial real estate lending was extremely healthy, certainly in a far better position than prior to the global financial crisis of 2008. Lenders were not over leveraged and banks had a relatively robust capital position. The evidence of this was the strong start to the year, with high volumes of successfully completed transactions.
Naturally the current global pandemic has halted a fine start to the year for this sector and with it has come new challenges to all lenders, as they pivot their businesses to cope with these trying times.
Ultimately new lending has paused for the most part; whilst there are some transactions being finalised and the odd ‘opportunistic’ lender ready to offer terms on new deals, most have taken this time to evaluate and take stock. The pause is not as a result of a lack of appetite to lend, more as a result of circumstance and logistics. Lenders are unable to simply inspect the collateral upon which they will be offering loans. Furthermore, whilst technology has certainly aided our new work from home culture, certain challenges arise when finalising the details of a transaction and having all parts moving in synchronisation during these times. There is also the sheer volatility of the real estate market, which will impact the terms of loans that could be offered.
As a result, this natural pause has allowed lenders to review their books and support their existing customer base through unprecedented circumstances. The full spectrum in the real estate world has been affected including lenders, borrowers and tenants, consequently most lenders see this as a time to provide support as opposed to seek new opportunity. The common theme in the lending community is one of collaboration, communication and openness in order to ensure all parties are supported.
Covenant waivers are being offered in order for loan caveats to be met, interest rate holidays are being discussed to support borrower cash flow, (although the June quarter is likely to see further demand for such concessions). This period of asset management for lenders is not necessarily a bad thing, it allows a full drains up look at existing loan books and for comprehensive management. One would assume a particular focus on the hospitality and leisure industries as two of the industries likely to be most affected by government exit strategies, thus lenders will be reviewing exposures across their loan books to manage the impact.
The long-term impact of COVID-19 on the commercial real estate lending market is yet to be known and it is too early for this to be predicted. It is likely lenders will continue to provide support to their current customer base during the lockdown period. As businesses start to come out of the lockdown the market is likely to continue to be slow for some time, however capital remains ready to be deployed for the right opportunities. Furthermore, in times of distress and potentially landlord failure there will be opportunity for assets to reprice, which in turn will stimulate the market.
During this period of consolidation, Gallagher can offer support to lenders in order to ensure insurance policies continue to meet the requirements of loan agreements. Gallagher’s Real Estate Due Diligence team offer a full insurance review service for all asset classes, we will provide advice in respect of the policies in place and liaise directly with the borrower’s insurance broker in order to ensure any gaps are filled, thus helping to protect your position.
Furthermore, once the market begins to recover, we can provide a similar review service for all new transactions, including the provision of a report in addition to a broker letter of undertaking. Our service allows for insurance professionals with real estate experience to offer peace of mind to an element of a transaction which can present hurdles to completion.