Lenders Adapting to New Market Dynamics

Marcus & Millichap, Calabasas, Calif., said the commercial real estate lending landscape has improved from the pandemic’s early days, when lenders and investors paused to assess the coronavirus’s impact.

“Following the second-quarter uncertainty-driven investment slowdown, buyers have become increasingly active with more lenders in the market,” Marcus & Millichap said in a special report, Capital Markets Beyond the Global Health Crisis.

Sales activity remains well below activity 2019’s level, but transaction velocity climbed nearly 25 percent from the second quarter to third as lenders adjust their strategies for a post-pandemic environment, the report said.

“Underwriting criteria has become more conservative with many lenders facing substantial headwinds, resulting in fewer options for some borrowers,” Marcus & Millichap said. “While liquidity has remained ample, loan-to-value ratios contracted as the health crisis unfolded” LTVs now rest in the 50 to 70 percent range depending on the deal and the borrower, the report said.

Debt-service coverage ratios also shifted, increasing to the 1.6 percent to 1.9 percent range, the report noted. “In some cases, more weight will be placed on the strength and experience of the borrower than the asset itself,” it said.

As big banks have trimmed their CRE lending, alternative lenders are stepping in to fill financing gaps, Marcus & Millichap said. “Government agencies were aggressive originators in recent quarters to account for a much larger share of lending activity…Local and regional banks have stepped up to close the lending gap as well, financing debt across most property types,” the report said.

Debt funds also helped fill the void left when larger banks and commercial mortgage-backed securities lenders slowed their CRE lending. “Yield-hungry investors are returning to the market, seeking to lock in low rates in a haven from geopolitical risks and the greater volatility of other asset classes, helping to support sales activity in the fourth quarter,” the report said.