We’ve all heard the news about mortgages over the last year or so, record low rates and favorable terms. It’s almost like free money, isn’t it? Well, it’s not that easy, and while it may be a better time to borrow than spend your hard-earned money, there are certainly some caveats. But one thing that definitely works in the borrower’s favor is that all lenders are competing for deals and a steady stream of new businesses.
And competition is a game at the moment. To stand out, lenders must take advantage of every possible advantage, including network connectivity and then, of course, designing a rate and package that will entice borrowers from the competition. But it’s a little more complicated than just setting an interest rate and signing a loan, ”says Bart Johnson, executive vice president of Wintrust Commercial Banking.
“Competition, as a rule, can be price or structural. Competition could be lower credit spreads or lower fees, ”Johnson says of the topic. “Other competition could be a smaller amount of upfront capital, longer periods of time with only interest payments, lower or zero covenants, or a deal without covenants.”
Johnson suggests that the current lending environment is more or less similar to the pre-pandemic lending environment, except for one of the biggest differences in asset class performance and how lenders overestimate which real estate product they operate in. Meanwhile, other lenders are looking to the future and working on deals that could evolve into a larger pipeline.
“Some of the traditional lenders or debt providers have moved on to other classes, like life insurance companies,” Johnson explains. “Life companies lend money similarly to banks, but traditionally they lend against stabilized assets. Now some life support companies say, “Wow, we’re going to build too.”
What is essentially happening is that debt servicers and creditors who have traditionally stayed on the same line are now merging with others, Johnson says. And this is mainly to stay ahead of deals in an already fiercely competitive market. But not only do lenders scrutinize different asset classes, but borrowers themselves.
“The hospitality, office and retail business are not only difficult asset classes for banks to lend against, but also difficult asset classes for investors,” Johnson says. “So you have investors who say, ‘Hey, I traditionally invest in an office building and I’ve heard a lot about industry – I need to put all my money into a logistics fund.’
And now that everyone is back at the table, we are seeing major shifts in the commercial real estate industry that could have a more long-term impact on which borrowers or asset classes are down or out. But about a year ago, that was not the case, Johnson explains, as the uncertainty of the pandemic and fears of a dramatic economic downturn have forced many players to pause.
“2020 was the best year for Wintrust Commercial Real Estate in the history of our company, mainly because many of our colleagues were on the sidelines and did not lend,” says Johnson. “Everyone is back today and the competition is very high.”
One space that has performed well throughout the pandemic and remains competitive is the multi-family space. While the apartment market and landlords with a large portfolio of apartments certainly jumped sharply, the story of how large-scale landlords were able to weather the storm working with tenants and taking advantage of the many assistance opportunities offered at the local and federal levels.
And this is a space in which lenders want to keep working, especially since multi-family families have not been hit as hard as other asset classes such as like retail or office market in the city center…
“People are misunderstanding how much the pandemic will affect the apartment market,” says Patrick Tuohy, senior vice president of apartment lending at Marquette Bank. “Of the assets in apartment buildings worth more than a billion dollars, we have no overdue payments. And the operators thought that they would be able to take some light assets, which did not happen, and prices did not fall. “
As for retail? Tuohy predicts that it will recover over time, but it will still have to compete with the convenience that e-commerce offers. And like many others said, retail will continue to focus on the service model. Going forward, retail must be very focused and localized — and provide the community with a service or product not available on the Internet — in order to survive.
But what about inflation and the trillions of dollars that have been pumped into the economy over the past year? Will this have any negative impact or impact on commercial lending and the commercial real estate world in general? What happens if interest rates stay the same low? Does it overheat the real estate market and lead to overpriced bid and sell prices? Or what if the stakes are suddenly raised?
Both Tuohy and Johnson believe that these are issues and topics to watch out for, but not necessarily serious issues.
“Here is a riddle; if they raise rates too early, the wheels will come off and things will slow down faster than they want, ”Tuohy says of interest rates. “But you know that $ 4 trillion is like a sugar high for the economy, and that’s inflation, but the Fed hasn’t been able to raise interest rates yet.”
Another thing that both Tuohy and Johnson are looking at is the overall resilience of the real estate industry as a whole and how much money is still circulating there waiting to be invested.
“With the move to COVID, there was heightened concern that the market would react very strongly, as it did in 2008 and 2009, but we had a very limited number of distressed properties as we survived the pandemic,” Johnson says of perception versus reality. pandemics. “And after COVID, a lot of people came out of it in a strong position, so hopefully in 12 months we will be back in a very stable world.”