Managing the Challenge

We are getting a lot of questions regarding the valuation side of the real estate market given the influences of the pandemic.  The challenge of unpaid rents, and monthly mortgage payments is hitting sectors of the real estate market in different ways.

At the beginning of the COVID – 19 pandemic, analysts and commercial brokers were painting the picture of hospitality being off 70% to 80% in 2020.  Multi family and retail properties were expected to have issue with rent collections and cashflow.  Offices as well as tenants re-assess their on-site workforce needs.  These rent collection issues are happening but not to the extent that was originally projected.  It does appear that rents in the larger cities are being affected more than the suburban markets.   A quote from an industry expert late last week stated that up to one third of larger city residents may be looking to move out. 

According to Berkadia

“Luckily, the true impact to multifamily properties has been less significant than initially projected. Collections for quality operators have remained relatively steady through April and May—compared to last spring, registering a two to five percent drop in collections while occupancy has remained strong. Class A and B+ properties have done well so far, owing to a tenant base that has been able to transition employees to work remotely. As we move to Class C apartment properties, unemployment has had a greater impact, so those asset types are experiencing slightly greater negative effects of COVID-19.”

 

Local and Regional Banks Step Up to the Plate per the Crittenden Report

“Watch for regional and local banks to be active lenders, while the major money-center banks remain in the dugout.  Bank lending will be slow and gradually increase through Q3 and Q4 as the economy revives.  Count on banks to be more selective with property type, location and borrowers.  Underwriting will change drastically with less aggressive loan terms including lower leverage, shorter amortization, along with higher DSC ratios and debt yield.  Also, anticipate an increased focus on borrowers with more experience and higher liquidity.  Strong sponsorship will be more important than ever both in terms of track record and financial strength. 

This is a concept that looks very similar to the 2008 and 2009 financial crisis.  The tightening of credit and cautionary measures. 

We still believe that the recovery is in the second half.  Interest rates are still at all time lows.  The economy is opening back up as people are getting out and about to restaurants, grocery stores and places of employment.   

How updated valuation tools can Help 

 

1. Know your cash flow position.  This is not a time for Financial Institutions to sit back and hope for a fast recovery.  The lack of rent payments in apartments or retail put a major hurdle in most investors cash flow and obligations to the bank.  With historically low interest rates over the past year, many investors have leveraged up properties providing a strain on cashflow. 

2. Liquidation of collateral. This is a large concern at financial institutions.  Borrowers that have limited liquidity have nowhere to turn with skipped rent payments.   Liquidation values in Appraisals can shed some light on what values are in foreclosure situations.

3. Is your collateral still occupied? Property Condition Assessments can be completed to verify occupancy and level of property maintenance.  Property deterioration is often an early indicator of loan performance. 

4.  Lastly, look to us for counsel regarding property valuation needs.  Market forces are changing quickly and require active monitoring.  We have the experience needed to provide solid recommendations.  After all, we have over 35 years of experience in all types of market conditions.

 

Mike Stout

Vice President, Commercial Operations

The William Fall Group

 Direct   419.418.5246

Mobile  419.704.0343

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