British rock band Queen and singer David Bowie probably were not thinking about commercial real estate when then wrote and released the chart-topping “Under Pressure” hit from 1981.
This year has proven to be very stressful for almost everyone, and commercial real estate players are not immune.
Three months into the crisis, temporary relief measures are reaching a point that will put commercial real estate owners under increasing pressure.
In March and early April as states shutdown non-essential businesses and consumers and travelers hunkered down, regulators made it easy for lenders to extend loans and allow for principal-and-interest holidays.
Borrower relief in combination with massive government stimulus allowed many renters and businesses to get through and landlords to work with tenants that were struggling. It also allowed many hotel owners to temporarily avoid defaulting on loans as their bottom lines got wiped out.
Those early relief measures for borrowers were generally for three-month periods. July will mark the end of the first three months.
The good news for many borrowers is that there are signs of improvement in the economy, and if more relief is necessary most banks still will be able to work with borrowers.
The greater fear is as states across the country see a spike in new COVID-19 cases, it could put a halt to the progress made to date.
For borrowers of commercial mortgage-backed securities, the fear is more acute.
Very few lenders of these types of commercial loans are willing or able to work with borrowers in a meaningful way.
The one tool that has been used for some borrowers is diverting reserves that would otherwise be used for capital expenditures to pay principal and interest.
That tool is an easy fix to liquidity shortfalls. And it is a way to help properties that have been impacted — mostly retail and hotel properties.
As those reserves dry up, however, lenders of commercial mortgage-backed securities loans will be looking for borrowers to cover shortfalls.
In the almost $900 billion universe of CMBS loans, about 18.22% of hotel loans and 10.79% of retail loans are more than 30 days delinquent, according to recent data from Trepp LLC, a New York-based analytics firm that collects data on publicly traded commercial mortgage-backed securities.
This contrasts distinctly with only 0.61% of outstanding multifamily loan balances.
Borrowers that are not impacted directly by tenants not paying (or lack of demand in the case of hotel owners) still will face a difficult time refinancing their properties.
For borrowers of commercial mortgage-backed securities, there are short-term measures available for extensions of maturity dates, but as the pandemic’s impact draws out, pressure mounts on owners with loans maturing in the next six months, particularly for retail landlords.
The International Council of Shopping Centers released research recently that depicted the pandemic’s impact on the shopping center industry nationwide. About 12.2 million jobs, $123 billion in sales and $35 billion in rent was lost between April and May, according to the research.
California lost the most, but Virginia ranked 12th with 316,237 jobs lost, $3.1 billion in lost sales and $907.2 million in lost rent.
One bright spot for borrowers continues to be that rates are low and are expected to stay that way for a while.
Multifamily rates from Fannie Mae and Freddie Mac are in the high 2% to low 3% range. Insurance companies are in the low 3% range and banks, depending on the credit of the borrower, can compete with all of the lenders out there.