Properties with bad operations are not goingto be able to get top dollar, but well-managedproperties are still going to go out there anddo well based on collections,” Hassan said.
Here’s a secret to CRE underwriting in theCOVID era: once the initial shock of the pandemic wore off, underwriters haven’t been asconservative as many had feared. Of coursesome asset classes almost write themselves: forinstance, in some markets multifamily hasreturned to pre-pandemic pricing making theunderwriting a routine matter. Other assetclasses, such as hotels and retail, are experiencing more profound shifts for obvious reasons.
None of this is to say that underwritinghasn’t become more conservative. It undoubtedly has. But underwriters haven’t seized upin paralysis and, in fact, many are putting inplace workarounds to make deals pencil in.
For example, some lenders are now doingwhat’s called a “COVID Reserve” where theyhold some capital back for six months to oneyear or until the pandemic is over and havethe confidence that tenants are paying theirrent again. Then they release the funds backto the borrower.
That said, underwriting clearly has beenaffected by the pandemic-led downturn. Inshort, lenders are using higher vacancies andreserves to underwrite, leading to more conservative loan proceeds.
For instance, loan to values are down 5%across the board, an example being if somebody was matching out at 70% loan to valuebefore the pandemic lenders are likely tomax out at 65% now. If there was a debt-ser-vice coverage ratio of a minimum of 120%now, lenders are likely at 125%. Cash-out onproperties has been conservative as well withlenders wanting to see as much equity in theproperty as possible.
Even in the multifamily space, where gov-
ernment-sponsored enterprises have been
active, assumptions surrounding operating
expenses, vacancies, market concession rates
and supply trends are being closely examined
by lenders. Concessions, for example, have
increased significantly since the pandemic
and underwriting is now taking that into
account, according to Daniel Withers, senior
vice president and senior director at Matthews
Real Estate Investment Services. The market
is seeing operators offer one to three months
of free rent and waive an array of fees that
they would have previously charged, such as
pet deposits, parking fees, and key/removal
charges, he says.
Increased concessions will put downwardpressure on revenue and net operatingincome. To secure a debt on a deal, investorswill need to increase capital reserves to compensate for this decrease in revenue. “Whengoing out to the capital market, operatorsshould anticipate increasing reserves in bothpurchasing and refinancing,” says Withers.“Lenders now require six- 18 months withdebt service reserves to proceed. We suspectthat the higher-than-normal increase in debtservice reserves will remain for the entire
2021 and perhaps even into 2022.”
Lenders are also scrutinizing borrowers’
credit profiles more closely than before and
in many cases are declining to work with com-
panies that have received strategic forbear-
GETTING DEALS DONE
However, once you navigate past these limits,deals are getting done.
For instance, according to a Marcus &
“WE SUSPECT THAT THE
INCREASE IN DEBT
WILL REMAIN FOR
THE ENTIRE 2021 AND
PERHAPS EVEN INTO
SENIOR VICE PRESIDENT AND SENIOR
DIRECTOR AT MATTHEWS REAL
ESTATE INVESTMENT SERVICES