With so many different talking points in the news cycle today, it can be hard to filter through the chaff and pinpoint the topics that matter the most to you. This is especially true if you work in an industry that typically doesn’t make its way to the headlines, such as CRE lending.
Knowing this, we decided to compile the most up to date information we could find related to CRE lending. In this article we dive into the three major factors affecting commercial real estate lending today, including:
- Ongoing Economic Risks
- Increased importance of innovation and tech
- Environmental strains introducing new variables
Ongoing Economic Risks for CRE
The COVID-19 pandemic changed every aspect of our lives in 2020, and the CRE industry was no exception. Although vaccination rates continue to rise and the world is slowly returning to normal, there are still a few ongoing factors that CRE lenders should keep in mind.
As of this writing, the COVID-19 Delta variant is causing a spike in cases that has led many cities and states to begin considering a return to stricter mask mandates, work from home policies and travel restrictions. This has reintroduced a level of uncertainty in the CRE industry similar to what was experienced in early to mid-2020. If this trend continues, underwriting loans and projecting market trends is going to become increasingly difficult for lenders over the coming months, and potentially years.
Along with this increased number of cases came an extension of the eviction moratorium first introduced in 2020. This moratorium restricts residential property owners from evicting tenants for not paying rent, so long as the tenant can prove they have been impacted by COVID-19 and meets certain guidelines. While the federal government has allocated $46 billion to help these tenants pay their rent, only $3 billion has been paid so far to the estimated 11 million adults currently behind on their rent. Although this may not directly impact lenders focusing on office, industrial and other commercial properties, lenders underwriting deals on multifamily properties will need to keep this potential threat in mind.
Another ongoing risk is the potential for an increased number of commercial loan defaults and foreclosures like was seen in the outfall of the 2008 recession. Commercial mortgage-back securities (CMBS) delinquency rates peaked at 10.32% in June 2020, barely below the record of 10.34% that was seen in July 2012. Delinquency rates have been steadily falling since this peak in June, but that doesn’t necessarily mean the industry is out of the woods just yet. Lenders must take care to factor in every potential factor in their underwriting decisions to insulate them from this potential risk moving forward.
Increased Importance Of Innovation And Tech
If one thing is certain, it’s that technology is changing the landscape of commercial real estate lending. This shift has already started to occur in similar industries, with many residential lenders already moving their processes online and most real estate brokerages offering virtual tours of spaces rather than having to visit in person. Unfortunately, commercial lenders have been slow to adapt to new innovations and are lagging behind.
“CRE lenders will need to reduce overhead, abandon brick-and-mortar locations and implement fluid sales software and automation to streamline and expedite their application processes” – Noah Grayson, South End Capital Corporation
Moving to an online platform not only allows lenders to remain competitive and create a better client experience, but also increases their agility when reacting to changes in the market. This is where a solution like Finance Lobby becomes so valuable, allowing lenders to change their lending criteria on the fly and avoid deals that made sense yesterday but won’t tomorrow.
Making the shift to a technology-focused process doesn’t have to be expensive, and lenders should find a happy medium between cost and quality that suits their needs. In the case of Finance Lobby, it’s completely free to get started and you only pay when you are matched with your first perfect-fit deal.
Agility is key in the commercial lending game, and innovation and technology are only going to become more important as time goes on. The lenders who choose to incorporate it into their processes now will be able to remain competitive moving forward.
Environmental Strains Introducing New Variables
Although we build buildings to give us a respite from the environment, it’s impossible to eliminate the impact that the natural world can have on a property. With climate change becoming an increasingly prevalent concern, a new set of environmental variables have been introduced that lenders will need to take into account.
“Climate risk will manifest itself in commercial real estate in numerous ways.” – Paul Morassutti, CBRE Vice Chairman
For starters, flooding is becoming a major risk for many property owners. CBRE, referencing a recent study by Morgan Stanley, notes that investors own nearly $60 billion of bonds backed by mortgages vulnerable to flooding, and 35% of all REIT properties around the world are currently exposed to risk of flooding and hurricanes. Between rising sea levels and an increased prevalence of flooding from events like tropical storms and hurricanes, flood risk will continue to rise for the foreseeable future.
Global warming is another environmental concern that is starting to make an impact on the CRE industry. Investors and developers are beginning to show a preference for buildings that are environmentally conscious, either through energy efficient building systems, renewable construction materials or carbon offsets. Many REITs and institutional investors are also beginning to incorporate environmental, social and governance (ESG) factors into their investment decisions, giving properties that meet certain environmental criteria a potential advantage.
Concern about the environment isn’t new, but the impact it will have on the CRE industry will continue to increase moving forward. Lenders will need to fully understand the implications of these variables and factor them into their underwriting decisions if they are to avoid risk associated with them. After all, nature can quickly turn a perfect property into a worthless one under the right (or in this case, wrong) circumstances.
We hope this article gave you a good overview of the factors affecting commercial real estate lending today. With so much change happening in our world recently, it’s more important than ever for lenders to stay up-to-date on evolving market trends and potential risk factors.
If you’d like to learn more about the CRE lending industry continue reading our blog. If you’d like to see for yourself how Finance Lobby can help you reduce risk and close more deals, sign up today to get started.