COVID-19 and Commercial Real Estate Considerations

Commercial real estate (CRE) valuations are currently in a state of uncertainty for various property sectors, as the depth and duration of an economic downturn is still unknown.

Landlords, tenants and lenders are hungry for data that reflect COVID-19’s immediate effects on levels of rent deferrals and abatements and the longer-term effects on rents, expenses and occupancies, but the script is still being written. All parties are in the middle of multi-faceted negotiations between stakeholders with diverging interests.

Many landlords are initially taking “hardball” positions to preserve asset values but ultimately recognize that they need their tenants to successfully navigate the crisis. Yet, landlords risk tripping debt covenants by granting too much forbearance to help ailing tenants, which brings lenders and special servicers into the mix.

The following is a collection of observations based on FTI Consulting’s review of current economic indicators and interactions with landlords, tenants, and their creditors.

Debt Financing Markets

Owing to this uncertainty, capital markets are in flux, with lenders looking to moderate risk.

Fewer interest-only loan offerings from CMBS lenders as bond markets recover from credit market turmoil in March.
Rising spreads leading to higher but still attractive interest rates.
Tougher underwriting assumptions to protect lenders against collateral risk.
Rising debt yields coupled with tighter underwriting is reducing available loan proceeds to borrowers.

Clarity on pricing and values will take months to resolve.

Lenders will have to contend with dramatically increasing defaults.
Ability and/or willingness to grant forbearance and restructure troubled loans will dictate the flow and resolution of distressed assets.
V-shaped, U-shaped or L-shaped economic recovery.
Canceled transactions and sidelined capital in anticipation of growing distress and lower prices.