Like all commercial real estate professionals, those working in commercial financing have had to adjust the way they do business during the last 12-plus months. But the good news? Commercial lending has remained steady, even during the height of the COVID-19 pandemic.
This has been a blessing for the commercial real estate industry and for cities across the Midwest. As commercial financing dollars – after a brief pause by some lenders – continued to flow, office towers, apartment buildings and distribution centers keep rising across the Midwest even as the region dealt with increasing COVID numbers, stay-at-home orders and mask mandates.
Midwest Real Estate News recently spoke with Jeff Musser, senior vice president with the Cleveland office of Bellwether Enterprise, about the state of commercial financing today. How has the industry evolved since the start of the pandemic, and what does the future of commercial lending look like as vaccines continue to roll out?
Jeff Musser, senior vice president, Bellwether Enterprise
Here is some of what Musser had to say.
How big of a challenge has it been doing business through this pandemic?
Jeff Musser: The pandemic threw everybody when it first hit. A year ago, when things really heated up in the United States and we had lockdowns and stay-at-home orders, those were pretty scary times for everyone. Most Americans didn’t know what was going on.
That transferred through to the capital markets. Insurance companies, CMBS lenders, they all took a pause. The agencies and banks might have taken a pause for about a week. In general, though, they didn’t stop lending. The agencies enacted some COVID reserves and some other stipulations. But it was fortunate that they stayed active throughout the pandemic.
But back in March of last year, it was a shock for all of us. For a few weeks, the market was frozen up. That lasted until the Fed stepped in and provided support to the market. That created confidence and brought liquidity back.
Looking back at the last 12 months or so, how resilient has the commercial real estate market been, in your opinion?
Musser: To be totally honest, it’s been a tale of two worlds. Companies that could work from home have done better. The stay-at-home orders didn’t impact their businesses as much. The more white-collar jobs didn’t miss too much of a beat during this time. But a lot of the service industry was hit hard. Places that were more impacted by the stay-at-home orders were hit very hard. Even though there is a light at the end of the tunnel with vaccines and some of the treatments coming out, many of those businesses are still not back.
If you just look at downtown Cleveland, you can see that we are nowhere near where we were pre-pandemic. I can look at the parking lots of the hotels here and see the difference.
I am an eternal optimist, though. Assuming nothing crazy happens with the variants and we continue to distribute vaccines at a good pace, hopefully by summer we will be much more normal than we have been.
How have the different commercial real estate sectors performed during this time?
Musser: Multifamily, industrial, self-storage and manufactured housing have really perfomed well. There is a lot of capital both on the equity and debt sides chasing those assets. Retail and hospitality, of course, have been hurt.
The good news is that a lot of lenders that were taking a pause are starting to come back into the market. A lot are still taking a pause, but many others are coming back in.
Are you seeing an increase in financing requests now than maybe half a year ago?
Musser: I think the market is strong. I feel like there are a lot of groups both on the debt and the equity side that are going after the same types of asset classes. Industrial, multifamily, self-storage and manufactured housing are the ones attracting a lot of attention from investors.
Rates have jumped up a bit relative to the past year. But they’re still relatively low. When you compare the rates of today to the ones of the last few years, we are still in an attractive interest-rate environment. I know some people are scared with how fast interest rates have moved since December of 2020, but they are still relatively low. Hopefully, they don’t rise too much more, too quickly.
Is there anything else that gives you pause or concern for the health of the CRE market?
Musser: There’s nothing else at this point. If rates do rise really quickly, that will slow things down. But besides that, I’m hopeful that the vaccines continue to get more widely distributed and we start to turn the corner on this pandemic. Hopefully, the hospitality and service industries will start to get back to normal.
Are you seeing any signs of improvement in the retail and hospitality sectors?
Musser: I think we have started to see them, especially in the warmer parts of the country. You see during spring break that there are people traveling and staying in hotels. It’s not like it was before the pandemic, but there has been a bit of an improvement here in Cleveland. There is excitement about the NFL draft coming to Cleveland in a few weeks. What will that do for the local economy?
So, yes, I do think things are starting to improve. We do have a ways to go, but it seems like in general, people are starting to get excited and anxious about getting back to normal. People are excited about enjoying the things we might have taken for granted in the past.
One last thing: When developers or investors do come to you with financing requests, what are some of the factors you consider when determining if you want to provide funding?
Musser: We look heavily at the property. Do we feel strongly about the property and its location? What tendencies are we seeing with that property? We look heavily at the sponsor, too. Is this someone whom we trust and want to get involved with? If those two boxes are checked, and if it’s a transaction in which we can add value, we are happy to work on that transaction.