Commercial real estate today is extremely dynamic. Under “normal” circumstances, that is a positive thing, but in the context of the events over the last four months, dynamic is detrimental. There has been much discussion about accelerated uses of technology in the industry and how it will impact retail, office, hospitality, multi-family and industrial real estate sectors. We hear a lot about PPP funds, rent deferrals, omnichannel strategies, decentralized supply chains, working from home and creating healthy environments for employees and customers.
One issue, though, that to this point has been largely missed is the relationship between lenders and borrowers. Over the next few years, there will unquestionably be fallout from the aforementioned discussions that will ultimately put stress on the relationship between lender and borrower in the commercial real estate space. So, what’s coming, and how do we address it?
To look at the future, the first step is to understand the underlying issues of where we are today. In this Covid-19 landscape, the stress on businesses has significantly impacted landlords across the board. Forced closures by governing authorities, diminished foot traffic in retail, vacant hotels, lower utilization of office space and disrupted supply chains are all examples of issues that tenants have faced throughout the commercial real estate sector. Even in multi-family where tenancy has remained high, and rent collections stayed strong, there is a fear that once the stimulus provided by the Federal Government is no longer a factor, collections could become a massive issue.
The effects on lenders and borrowers will be felt across the board. If tenants can’t pay rent, which, in turn forces landlords to either seek relief from their lender or not perform on loan requirements, what happens next? For the few borrowers with deep enough pockets, they could attempt to pay penalties or cover debt service themselves, but at the expense of wiping away a lifetime of work and cash reserves. Furthermore, there is no guaranty that in six months or a year down the line, there will be enough tenants paying rent to stabilize the property and sustainably cover debt payments. Some tenants have continued to stay afloat, but how long can they hold on operating at reduced capacity, unable to get stable shipments of supplies or workers. And, how long can a landlord continue to float the debt service from reserves before they are gone altogether?
So far, most landlords and tenants have recognized their unique predicament and have tried diligently to work together to bridge the gap for survival. Still, as time goes on, this will become less tenable, and there will be fallout. The same issues will inevitably arise between the lender and borrower. We already see this in the CMBS segment of our market, where both sides have less leeway to work through cash flow issues. That said, the real stress has yet to be realized across the industry.
As the crisis continues—regardless of the pace of recovery—more commercial properties will certainly be impacted in both the short- and long-term. We anticipate a significant increase in distressed properties, which will go into servicing or foreclosure. As a result, investors and property owners will be left to sort through the chaos.
At Stirling Properties, we have begun working with lenders, servicers and property owners to strategize solutions for potential problems that continue to grow as loans rollover, values decrease and properties default. While there is no one-size-fits-all solution to the issues, our Lender Solutions Program can help.
We have created a platform that, regardless of the type of lender or borrower issues, can help to alleviate the stress. Stirling Properties has a proven track record of success working with all commercial property types to develop a plan and achieve the end goal. Whether it is to stabilize an asset for the current borrower, manage a property and process through foreclosure, or ultimately find the right purchaser through asset disposition, we have the experts to achieve the desired results.
If you are an investor, property owner or lender who needs assistance with valuation, asset and property management, development or disposition services, please reach out to us. Our experienced commercial advisors are knowledgeable in various property types and market segments.