Real Estate Capital Scoreboard® – December 2020

Chicago, Illinois, December 1, 2020 – The last month of the year shows that lenders remain conservative. Given the crippling effects of the pandemic, funding sources heavily focus on borrower experience and financial resources, in addition to asset quality. That said, most lenders are flush with cash, actively desiring to place funds today and into the foreseeable future.

On the other hand, property owners and premisists find interest rates very appealing. Shorter-term loans of five years or less start in the mid-2%-or-higher range. Ten-year debt is typically priced a quarter to half percent higher, with most loans falling well below four percent for desirable properties – namely apartments, credit, and industrial assets.

While ample funds exist at desirable rates, lenders still require robust underwriting tests. Cash flow projections usually assume no income growth, and heavy discounting occurs on specialized space (e.g., retail and lodging). Given the low interest-rate environment, debt service coverage ratios of 1.5X to 2X are the norm. Debt leverage of 50% to 70% is typical.

The Real Estate Capital Institute’s director, John Oharenko, suggests, “The effects of the pandemic dramatically change the face of real estate capital markets. However, unlike the Great Recession, funds remain available but based on very selective criteria. “

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