Real Estate Capital Scoreboard® – June, 2020

Chicago, Illinois, June 2, 2020 – This year continues with more surprises, as civil unrest overtakes COVID-19 worries.  Communities feel financial and emotional pains as federal, state, and local governments continue operating in crisis mode.

The commercial real estate industry, too, moves to crisis mode even as businesses reopen.  In the capital markets, funding sources creatively cooperate with property owners to find solutions for returning to more normal conditions.  However, recent events bring more permanent changes to the markets, including the following underwriting trends emphasizing the word “minimum”:

Minimum Pricing:  Lenders mostly ignore pricing indices tied to treasuries, as meager benchmark rates hardly reflect current risk/reward profiles. Today’s pricing for prime longer-term debt dips into the low-3% range.  However, most loans fall within the 3.5% to 4.5% range, depending upon property type and risk profile.

Minimum Leverage:  For new-origination loans, fifty to sixty percent loan-to-values accurately demonstrate lenders’ reluctance to take loan risk during such uncertain conditions.  Higher equity requirements remain the best tools for risk mitigation.

Minimum Development Risk:  New construction projects stall as investors monitor highly volatile market conditions based on existing development pipelines and changing consumer demands.  As a result, more discounting occurs on construction costs; in some cases, by as much as fifteen percent.  Also, more cooperation exists between municipalities and developers, as problem-solving takes the forefront of capital market decision-making.

Minimum Threshold Safety Requirements:  Lenders, investors, authorities, premisists, and nearly everyone involved with operational property decisions now focus on occupant physical safety and health conditions.  Professional operations require outlining how such issues are addressed from property to property.

Minimum Contact:  Investors focus on providing premises with social distance as an essential physical design benefit.  Expect more space per person, and at highly competitive pricing given the overall malaise of office, retail, lodging, and other “non-essential” property types.

The Real Estate Capital Institute’s® director, John Oharenko, adds, “It’s back to basics of the industry.  While financial performance remains a priority, life-safety issues rightfully take the spotlight in today’s commercial realty markets.”

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