We’ve all heard the news about mortgage lending over the last year or so about record low rates and favorable terms. It’s almost like it’s free money, right? Well, it’s not so simple, and while it may be a better time to take on debt than spend hard-earned cash, there are certainly some caveats. But one thing that certainly works in a borrower’s favor is that lenders are all competing for deals and a steady pipeline of new business.
And competition is the name of the game at the current moment. To stand out, lenders have to leverage every advantage possible, including tapping into networks and then of course, working out a rate and package that will lure borrowers from the competition. But it’s a little more involved than just simply setting the rate and signing a loan, says Bart Johnson, Executive Vice President with Wintrust Commercial Banking.
“Competition can be, in general, price or structure. Competition can be lower credit spreads or lower fees,” Johnson says about the theme. “Other competition could be less equity upfront, longer interest-only time periods, lower or no covenants, or a covenant-light transaction.”
Johnson suggests that the current lending environment is more-or-less similar to that of the pre-pandemic lending environment, except one of the biggest differences in the performance of asset classes and how lenders are reassessing what real estate product they’re working in. Meanwhile, other lenders are looking ahead and working on deals that could turn into a bigger pipeline.
“Some of the traditional lenders or debt providers have gone into other classes, such as life companies,” Johnson explains. “Life companies lend money similar to banks, but traditionally they’ll lend on stabilized assets. Now, some life companies are saying, ‘Wow, we’ll do the construction loan as well.’”
Essentially what is happening is that debt servicers and lenders who traditionally stayed in one lane are now merging into others, Johnson says. And this is largely to stay ahead of deals in an already fiercely competitive market. But it’s not just the lenders who are looking at different asset classes with more scrutiny, it’s also the borrowers themselves.
“Not only are hospitality, office and retail difficult asset classes for banks to lend against, they’re difficult asset classes for investors,” Johnson says. “So you’ve got investors who are saying, ‘Hey, I’m traditionally an office building investor and I’ve heard a lot about industrial — I need to put all of my money in a logistics fund.’”
And now that everyone is back at the table, we’re seeing major shifts in the commercial real estate industry that may have longer-term impacts on which borrowers or asset classes sink or swim. But it wasn’t like this a year ago or so, Johnson explains, as the uncertainty of the pandemic, and fears of a dramatic economic downturn caused a lot of players to hit the pause button.
“During 2020, Wintrust Commercial Real Estate had the best year in the history of our company, largely because a lot of our peers were on the sidelines and not lending,” Johnson says. “Today, everyone is back and competition is very high.”
One space that has performed well throughout the pandemic and remains competitive is the multi-family space. While there certainly was an abrupt jolt to the apartment market and landlords with a large portfolio of units, the recurring story has been about how larger scale rental landlords were able to weather the storm by working with tenants and through the use of the numerous aid opportunities offered at local and federal levels.
And it’s a space that lenders want to keep getting in on, particularly as multi-family has not suffered as much as other asset classes such as retail or the downtown office market.
“People misread the tea leaves about how bad the pandemic was going to affect the apartment market,” says Patrick Tuohy, Senoir Vice President at Marquette Bank, who focuses on apartment lending. “Out of over a billion dollars worth of assets in multifamily, we don’t have a late pay. And operators thought that they were going to be able to pick off some easy assets, which did not occur and prices did not fall.”
As for retail? Tuohy predicts that it will recover over time, but it will still have to compete against the convenience that e-commerce offers. And like many others have said, retail will continue to focus on a service-based model. Going forward, retail will have to be very focused and dialed in on the local market — and providing the community a service or product that the internet can’t — in order to survive.
But what about inflation and the trillions of dollars that have been pumped into the economy over the last year? Will this have some sort of negative impact or consequences on commercial lending and the broader commercial real estate world? And what happens if interest rates continue to remain as low as they have? Is it overcooking the real estate market and leading to overly-inflated asking and sale prices? Or what happens if rates are then suddenly raised?
These are all issues and themes to keep an eye on, but not necessarily major concerns, both Tuohy and Johnson suggest.
“Here’s the conundrum; if they raise rates too early, the wheels will come off and things will slow down quicker than they want,” Tuohy says about interest rates. “But you know, $4 trillion is like a sugar high for the economy and it is inflationary, but the Fed is going to be hamstrung for the time being about raising interest rates.”
Another thing that both Tuohy and Johnson hit on is the overall resilience of the real estate industry as a whole and just how much money is still circulating out there, waiting to be invested.
“Going into COVID, there was a heightened concern that the market was going to react very much as it did 2008 and 2009, but going through the pandemic, we had a very limited amount of distressed properties,” Johnson says about the perception versus the reality of the pandemic. “And coming out of COVID, a lot of people have come out of it in a strong position, so hopefully 12 months from now, we’re back to a very stabilized world.”