Guest column: Commercial real estate loans in the post-pandemic world
By Robert G. Stern
Tampa Bay Business Journal
Published: Jan 15, 2021

As a former banker who has served as attorney and legal counselor for many banks over the past 30 years, I am often asked how lenders for commercial real estate developments and projects have responded to the pandemic, and, more importantly, what types of projects will be attractive to them going forward.

How 2020 impact on lending sets the table for 2021

Because of the Covid-19 pandemic, 2020 has been an eventful, stressful and overly busy year for the lending industry. Lenders and bankers have dealt with unprecedented and unexpected loan defaults, moratoriums on evictions and foreclosures and complicated new financial loans made through the Paycheck Protection Program and Coronavirus Aid, Relief and Economic Security Act.

The PPP loan program was designed by the Small Business Administration to provide direct incentives for small businesses to keep their workers on the payroll. The SBA will forgive the loans if employee retention criteria are met and the funds are used for eligible expenses such as rent and mortgage interest. These financial assistance programs have reduced and delayed what might otherwise have been inevitable defaults and collections. As a result, lenders are not aggressively pushing borrowers for late payments, especially if the borrower is a landlord that is dependent on payment from delinquent tenants.

Most lenders have been in turmoil and played more defense this year. They were given a shockingly short period of time to understand an entirely new PPP loan program and then to underwrite, approve and close many complicated loans. The business community should be thankful that in addition to serving their current customers, bankers rose to the occasion, exceeded all expectations and closed and funded over $525 billion in new PPP loans in only a few short months.

Because of the coronavirus public health emergency and the resulting turmoil, very few lenders had time to spend significant time with their current customer base, prospect for new loans or reach their initial lending goals. As a result, the lending industry will have a large backlog of funds and incentive to make new loans next year.

Banking and lending expectations in 2021 and beyond

We expect there will be a large wave of defaults and bankruptcies in the first quarter of 2021, fueled by governmental assistance running out and a delay in reopening the national economy. As a result, banking and creditor attorneys are predicting a large volume of collection, eviction and enforcement actions upon the expiration of the moratorium. When a borrower or sponsor is willing to invest additional time, energy, effort and collateral, however, it often leads to a quick and amicable resolution for all. While banks are fixing the bad loans and curing the prior defaults, they will want to start making good new loans.

The most attractive and easiest to finance projects will be those with the strongest deal sponsors who demonstrate a high liquid net worth and provide unlimited and unconditional personal guarantees of the loans. These guarantors should put more “skin in the game” with their own funds in order to reach a lower ratio of the loan amount to value of the project. This will increase the attractiveness and financeability of the project.

New banks, deals and developers will continue to flock to Florida. We are fortunate to be in the Tampa Bay region, which has strong population and job growth, a balanced budget and no state income tax.

Some loan segments and industries will fare better than others. Banks will have a wide spectrum of interests and appetites in different projects. On one end, hospitality and hotels will be the hardest to develop or finance until the travel industry is restored. Restaurants and retail remain in limbo until we return to full employment. If the transition to working from home becomes permanent, there is likely to be less demand for office. Medical uses and offices will continue to be strong, however. Industrial warehouses, like Amazon, as well as last mile delivery companies, will have the highest demand and strongest rents, which will make them the easiest to finance.

In short, we expect 2021 to see an increased demand for loans, and an increased supply from banks as they get back to business as usual.