Like most aspects of the commercial real estate landscape, lending has felt the influence of COVID-19. As one might expect in a global pandemic, newly signed leases have declined and for some sectors, mortgage delinquency rates have skyrocketed. While some firms are tightening their purse strings and waiting out the storm before considering their next venture, others are hoping to take advantage of low interest rates and distressed assets prices. But even with plenty of dry powder ready to deploy, firms looking to buy still need to get approved by a lender, and this could be a challenge.
According to the Mortgage Bankers Association (MBA), both commercial and multifamily lending is set to decline by 59 percent in 2020, as compared to the record high volume of $601 billion in loans backed by income-producing properties in 2019. This year, the MBA estimates the loan total to reach $248 billion and slightly increase to $390 billion in 2021. The MBA’s vice president of commercial real estate research, Jamie Woodwell, explained, “The ongoing COVID-19 pandemic continues to disrupt commercial and multifamily real estate markets. Forecasting amidst the social and economic responses to the virus is difficult, but we do expect originations to drop significant[ly] this year before making a sharp, partial rebound in 2021.” Visibility into the industry’s future, including forecasting and valuation, is at an all time low as different areas of the country struggle to make and follow reopening plans as COVID-19 cases surge. Some property companies are beginning to use alternative data to help better gauge valuation.
Better valuation methods help companies when it comes to understanding the market, but it still doesn’t help with access to lending capital. I spoke with Tim Milazzo the CEO and Cofounder of StackSource, a lending technology platform that acts as a marketplace for borrowers seeking commercial loans. Milazzo gave me a rundown of the current lending landscape and why lending technology is so important right now. “The capital markets are changing, right? So many more lenders have paused their lending due to COVID. A lot of them are just trying to figure out their own portfolio and trying to figure out where the economy is and where it’s going to be. So they’ve either paused lending, or they have restricted it,” said Milazzo.
Milazzo acknowledged that the second quarter of this year was awful for almost everyone, as the economy was basically shut down. But, he thinks the situation is beginning to look more positive. “Things are opening back up a bit. Rates are really low, too, so a lot of people are refinancing,” Milazzo explained. The restrictive precautions that lenders are taking makes the transparency that technology like StackSource creates more valuable than ever. “If people aren’t able to go talk to their local bank and get a decent loan now, they’re going to be looking online,” Milazzo said. As more borrowers try to find lenders, they will end up using services like StackSource because they will have to shop a wider market.
An online lending marketplace offers several benefits to borrowers, namely providing them with options by allowing them to source loans from hundreds of lenders, not just those that are nearby or within their city. “We keep track of who’s lending, in what way, and on what assets. What are their sizing constraints? What are their pricing parameters like? We have all of this information that we track on hundreds of lenders. And so when somebody has a loan request, we’re matching them to all the relevant lenders in the market,” Milazzo explained. By providing the information borrowers need, all in one place, it not only expands their options, but also helps them find the best terms for whatever they’re looking to finance. This kind of information is especially useful during a time when lending is at a low.
Paused or restricted lending doesn’t just mean that less loans are being approved, it also means that loan terms are being restricted as well. In some cases, lenders are giving less money for the same property, as opposed to pre-COVID loan amounts. According to Milazzo, even government sponsored enterprises like Fannie Mae and Freddie Mac are either issuing smaller loan amounts or requiring higher cash reserves. “So if you’re buying a property for a million dollars and you’re taking out a half million dollar loan, they may require you to put more cash in to be held in a reserve account, just to make sure ‘Hey, if this property stops producing income, we’re still going to be able to take from that account to keep the payments coming.’ And so reserves are way up across the board,” said Milazzo.
Where you might have once gotten a loan for 80 percent of the property’s value, now it could be 60 or 70 percent. Borrowers need to be mindful of what they’re asking for and understand that loans are going to require more rigorous standards. While pre-existing relationships have always been important in financing, they may not mean as much now, as lenders have to objectively look at what terms will carry the least amount of risk.
Similarly, borrowers may have to look to different types of lenders than they did in the past. Larger lenders like commercial banks and credit unions are very regulated. Typically, these larger organizations have more red tape to work through, which can slow them down. Alternatively, Milazzo said that “private lenders adopt certain types of technology faster than banks,” which may mean borrowers could have better odds at securing a successful loan with them. However, larger, older organizations like banks have been quicker to adopt online document management portals, and this can be helpful during the loan closing process.
As with nearly everything in commercial real estate, lending has long been a relationship-based process that relies little on technology. But as we’ve witnessed in other parts of the industry, from HVAC automation to virtual tours, the pandemic is forcing commercial lending Luddites out of the dark ages and into the present (and future). The lending landscape is in for a lot of changes in the coming months and years. From changes in loan to value ratio assumptions to fears of inflation due to monetary policy, getting a commercial loan will not be the same as it was before the pandemic hit. Both borrowers and lenders will be reinventing the ways that they close lending deals, and technology will likely be at the heart of the reinvention.