Last year was dominated by the fallout from the COVID-19 pandemic, which almost immediately ended the longest U.S. economic expansion in history and has caused major distress in many areas of the commercial real estate market.
Late this past October, Jamie Woodwell of the Mortgage Bankers Association (MBA), the trade group’s expert on commercial real estate, spoke with Scotsman Guide about the outlook for 2021 and the prospects for recovery.
Has MBA done any projections on commercial real estate origination volume or sales for 2021?
There is still a fair amount of uncertainty and, given the way the pandemic has unfolded, the amount of change that one can see in just a few months is pretty dramatic. So, any type of forecast we make in October, by the time January comes around, we could be in a very different place.
Have some asset types escaped the downturn while others are suffering?
There have been a whole host of differences. Hotel and retail sales were down about 70% in the second quarter compared to 48% [for all asset classes] overall. Multifamily was down just 24%. So, you do see differences. On one end, you’ve got lodging and retail properties that were hit dramatically and really immediately by the onset of the pandemic. But then you see other property types that haven’t seen the same types of impact. If you look at multifamily or industrial or office, that performance has remained relatively steady thus far.
Have lenders significantly tightened their loan criteria?
We’ve actually done a couple of surveys on this. There’s a strong appetite from a whole variety of lenders to put money out into mortgages. What they’re working through is, what are the property types and situations they feel most comfortable doing? Some element of it is property-driven, so there is greater comfort with industrial and multifamily as a class than perhaps retail.
Lenders are really grappling with two questions. One is, what are the prospects for the property after the pandemic, its future cash flows and the ability to support a mortgage? And then two is, how does the property get from here to there? Does it need some additional reserves? Does the current underwriting support it?
There’s a strong appetite from a whole variety of lenders to put money out into mortgages. What they’re working through is, what are the property types and situations they feel most comfortable doing?
Have asset values fallen much?
There haven’t been a lot of transactions to really see, in a systematic way, what might be happening to property values. There are going to be significant differences by property type and by market. During the global financial crisis, the biggest impact on property values wasn’t changes in underlying cash flows of the properties. It was the capitalization rate that investors were using to value properties. Here, we might be seeing a little bit of the reverse, where we might see a little bit more stickiness in valuations in terms of the cap rates being used. Really, today, investors are looking at the cash flows and trying to understand whether some of the impacts are short term or longer term.
Will we see many distressed properties sell in 2021?
What we’re seeing right now is large shares of hotel and retail loans that are delinquent. That could lead either to loan sales, property sales in foreclosure or other resolutions. It is definitely something to keep one’s eye on. We’re seeing less stress in the other property types than those two. A great deal will depend on how long the pandemic lasts.
Is there any reason for optimism that the market will recover quickly?
There are two things I would throw out there. With the onset of the virus, we saw the unemployment rate jump above 14%. It’s now down below 8% (as of September 2020). It’s still more than twice what it was, but that’s a remarkable improvement from what we saw earlier [in 2020]. On top of that, we saw that government programs were really effective in helping households meet their obligations. Overall, we are learning a lot and adjusting our behavior, and the economy is in a lot better shape than it was just a quarter or so ago. ●