While many people are optimistic that there is a light at the end of the Covid-19 tunnel, the reality is that the economy is still in the tunnel. And while some aspects of life are returning to a pre-pandemic status, commercial real estate is not one of them.
In this edition of Suite Talk, Senior Enterprise Editor Phil Hall speaks with Robert Withers, president and CEO of M1 Capital Corp. in White Plains, on the challenges that continue to impact the commercial property sector.
We last visited with you in June 2020 for our YouTube Video Conversation series. How has the state of the commercial property evolved since that time?
“It depends on the asset class. If you”™re talking about valuations, all of them have seen some impact that can range anywhere between 15% or 20% all the way to 40%.
“Multifamily and office fared the best and are the least impacted, and industrial has done well. But the small mom-and-pop, commercial mixed-use properties ”” maybe it”™s some apartments over two or three retail units ”” have found themselves in trouble, along with the smaller strip centers and even some of the larger shopping centers due to issues that were already there but were exacerbated by the virus.
“I think over the next six months to eighteen months there”™s going to be some pain in the core asset classes, and that probably has a lot to do with lenders taking very defensive positions. Rent collections are not really going back to normal anytime soon ”” and how many times can you issue a forbearance? Some of these larger landlords have two or three forbearances that they have worked on, and sooner or later the bill comes due. Forbearances really don”™t do anything but kick the can down the block.
“What you”™re going to need to see is a reworking of a lot of these mortgages. Whether or not they”™re institutional or conventional mortgages, they”™re going to have to be modified.”
For commercial property owners who are either in default or nearing default to a lender and need a way to get funding to help them out, what are the best options available?
“If you”™re having an issue with your commercial mortgage bill, you need to modify it. Usually, what”™s best to work with an intermediary, either a company like ours or an attorney who ”˜speaks bank.”™ The modification can come in several ways.
“Part of the process involves repositioning, and a lot of commercial landlords are going to find themselves with properties that no longer work with the current tenancy or the current purpose; the property is just not going to work as a restaurant or a bodega or whatever it is. They have to reposition it and work with a lender to create a better opportunity for themselves with the property if they want to hold on to it.
“For example, maybe a small strip center that has five or six retail stores is no longer anchored by a strong tenant ”” maybe you want to raze it and create office or multifamily. I”™ve seen that deployed down in Florida where small motels don”™t work anymore and they”™re being reconfigured into apartments.”
What about refinancing? Are commercial property owners finding it easy to refinance their mortgages?
“The fundamentals of the property have to be strong. If your property has a restaurant or any sort of retail component that depends on traffic coming in and out of your business, there”™s going to be intense scrutiny put on that lease.
“Lenders are diving into the metrics into the business fundamentals of the tenants like I”™ve never seen before. They have to understand what is going to be there and if the tenants can continue to be able to pay the rent so that the owner can pay the mortgage.”
Is credit readily available today for commercial property borrowers?
“Credit is not getting looser, it”™s getting tighter. Banks are in business to be able to make loans, but they”™re more cautious. They”™re lending at a lower loan-to-value instead of 75% leverage ”” they may consider a 65% or 70% leverage.
“I don”™t see credit loosening up anytime later this year due to the fallout and the repercussions of what we”™re going through now. That is going to be felt for a while. I think there”™s money available, but it”™s not aggressive and it”™s going to be well into 2022 until you start seeing banks return to normal, whatever that is.”
