Commercial real estate lenders growing more conservative due to COVID-19

Listen to this article

In his over 30 years in the business, Kurt Sertl, director of leasing and finance for Gallina Development Corp., says that he has “gotten more phone calls from my existing lenders in the past nine months just checking in how things are going in our portfolio than I got in my entire career before that.”

Sertl says the economic fallout from the COVID-19 pandemic has sensitized lenders for commercial real estate loans to be more thorough in their underwriting regarding developers’ underlying repayment sources and only lending on a more conservative basis regarding loan-to-value, interest rates and the amortization schedules.

Lenders are taking a closer look at the underlying tenants to see if they are at risk of “going dark or filing bankruptcy,” Sertl says.

“The underwriting has become more thorough,” Sertl says. “Some lenders have pulled back and are not real interested in putting new money out right now. Other lenders are aggressively putting out new money right now. Some banks are going to make some market share and some banks are going to lose some market share.” 

Jeffrey Fasoldt Sr., chief financial officer for DiMarco Group, says, “because of the impact of the pandemic on retail and the impact of the pandemic on hospitality, those are areas where financial institutions, including traditional banks, insurance companies and other lending entities, are very hesitant to proceed with any of those projects. That has delayed projects as well. 

“Projects we expected to start in 2020 we pushed into 2021,” he added. “We have significant backlog built up that will take us through the next couple of years.”

Fasoldt says DiMarco Group has been able to deal with the shift in the lending market by reshuffling projects in terms of priority and the interest in the financial community. A multifamily project in North Carolina, a medical office building project and the rehabilitation of a retail shopping plaza are all projects that have piqued interest from lenders, Fasoldt says. 

“This is a time you really draw upon your partners and the relationships and the goodwill you’ve built up over time,” Fasoldt says. “We’re a very diverse and very strong organization financially. We’ve been able to rely on that with our close financial partners to advance projects that maybe other developers would have struggled with.” 

Fasoldt says the company is seeing lenders only willing to lend at a lower proportion of the fair market value of a project. He notes that lenders might have been willing to lend 75 percent of an apartment complex project but now might only lend 60 percent of such a project.

“It’s important for developers to be very well capitalized,” Fasoldt says. “A lot of financial institutions are just sitting on the sidelines right now. Other institutions are redlining certain areas they just don’t want to increase their exposure to. They may not want to increase exposure to new retail, especially assets that, if not in distress, are somewhat challenged.” 

Brendon Crossing, senior vice president and group manager for commercial services at Canandaigua National Bank & Trust, says that Paycheck Protection Program loans have helped many customers facing reduction in revenues.

Crossing adds that CNB’s loan committee continues to meet every Tuesday and Friday, and it is using the same metrics in terms of debt-coverage ratio, price per square foot and loan-to-value ratios as it always has.

CNB is still doing construction loans and that he sees a lot of construction and development going on, Crossing says.

Crossing notes he just closed on a project in Canandaigua for the purchase of an entirely vacant building where the owner is guaranteeing the loan. 

CNB is doing more due diligence in terms of underlying tenancies and making sure they are not deferring their rent and catching up on rental arrears.

Crossing says multi-family developments are strong prospects. In fact, one project he is involved in lending for has a waiting list of 100 people.

Crossing asserts that it will take several years to feel if companies will truly be cutting back on office space by having their employees work from home because of long-term leases of five, seven or 10 years.

Steven Epping, senior vice president for commercial banking and commercial real estate for M&T Bank, says he and his colleagues have stayed very close with their customers with phone calls and videoconferencing a couple times a week.

Epping says his institution has always been “somewhat conservative” in its underwriting of commercial real estate, and it has not significantly changed its underwriting practices as a result of the pandemic recession.

Epping says M&T is taking a close look at the tenants in projects and the property types like hotels and restaurants and how those buildings will emerge from the COVID-19 economy.

M&T has been finding places in the secondary market to place some projects like multifamily projects with government-sponsored enterprises Fannie Mae and Freddie Mac and insurance companies for office building projects, Epping says. M&T also is very active in lending for affordable housing projects.

“Diversification is always important for lending for real estate projects,” Epping says. “A mix of different type of tenants does give diversity and does eliminate some risk.”

According to Sertl, he has focused on refinancing Gallina’s portfolio right now “given that interest rates are at extraordinarily all-time lows.” 

Sertl also says it is going to take at least two or three years to understand how working from home and increased e-commerce is going to affect different real estate assets.

Unlike the United States’ largest metropolitan area, Fasoldt e does not think the pandemic will cause a significant shift in where people live in the Rochester market or other upstate New York cities.

Fasoldt foresees that some companies are going to move away from open office environments and bring back some form of physical barriers. He also says that, while shopping malls will not be built, open-air shopping will provide development opportunities long-term.

“In this industry, real estate development projects can take 10 years before you put a shovel in the ground, and that can take 18 to 24 months to build and another year or two to fully occupy and stabilize,” Fasoldt says. “You have to think for the long term. You can’t change your plans based on a relatively short period of time.”

Amaris Elliott-Engel is a Rochester-area freelance writer.