Interview

Duff & Phelps Exec Says Real Estate Lending Is Nearly Frozen

By Andrew McIntyre
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Law360 (April 24, 2020, 2:15 PM EDT) --
Ross Prindle
Ross Prindle
As the COVID-19 pandemic continues to rattle the global financial and real estate markets, commercial real estate lenders have nearly stopped providing financing, one of many challenges for the sector, Duff & Phelps Managing Director Ross Prindle told Law360 in a recent interview.

The liquidity question has been top of mind when drawing comparisons between the current pandemic and the Great Recession, when credit markets dried up entirely, and Prindle, who is also global head of the financial consultancy firm's real estate advisory group, said it's now difficult to come by loans for commercial properties.

That, by extension, means it's also difficult to do purchases.

"Lending has pretty much stopped for commercial real estate, with multifamily and single-family being the exception," Prindle said, noting that government-sponsored enterprises Fannie Mae and Freddie Mac are still backing residential loans.

"Transactions have stopped ... since there are no dollars available," Prindle added. "Until America gets back to work, this is ... going to be the norm for a couple of months."

Moreover, the pandemic is creating various other challenges for the real estate sector, Prindle said. Landlords, tenants and lenders are all trying to sort out COVID-19-induced financial difficulties, and things will likely get worse on that front when May rolls around, he said.

"The sectors that are hit the hardest are ... hospitality, lodging and resorts. Occupancy is exceptionally low across the board," Prindle said. "Retail is the second hardest hit. The regional malls across the country, they're all closed. Most think they will not be open until, the earliest, in July."

"Landlords and tenants are negotiating rent relief and rent deferral agreements on a tenant-by-tenant basis," he added.

Landlords already took a major hit with steep reductions in April rents, and Prindle expects those rent losses to grow come May 1, which then creates additional financial pressure for landlords, who have mortgage payments due. While tenants have gotten some relief from the federal government, there has not yet been a federal bailout for landlords.

"As of April, ... 15% to 25% of rent was collected, which is really, really low," Prindle said. "We expect May 1st is going to be worse."

And landlords, who are now struggling to make their mortgage payments, are trying to work out solutions with their lenders. There's also lobbying Washington for relief, Prindle said.

"It's an active negotiation now between landlords and debt holders," Prindle said. "Some of this is [commercial mortgage-backed security] debt, which has involved dealing with a servicer."

Multifamily landlords, though, have not been hit as hard as commercial landlords, although numbers there will also likely be worse in May, according to Prindle. He said that most multifamily landlords collected between 92% and 96% of rent in April, but that he expects the wave of unemployment filings in April to push that number down come May.

Just how commercial properties will fare during and after the COVID-19 pandemic depends on a number of factors, including asset class, location and the strength of the property before the pandemic hit, Prindle said. He said he groups properties into four buckets, ranging from strongest to weakest.

The first contains properties that have the least risk and are likely doing fine amid the pandemic, such as logistics properties leased to Amazon.com Inc. and certain grocery stores. The second bucket, Prindle said, are those properties that are "affected in the short-term but are expected to recover." Such properties may have been subject to local or state government shutdown orders and owners may offer two to four months free rent to tenants, but are likely to recover.

The third bucket contains properties that were struggling before COVID-19, like certain small shopping centers or other retail properties, which are likely to go vacant as a result of the pandemic, Prindle said. And the final bucket is properties that were vacant before COVID-19 or properties that were expected to be soon leased, which according to Prindle will be the hardest hit.

"Assumptions that you had before are now no longer valid," Prindle said. "Timelines are going to be much longer."

However, there has been a "bright spot" in commercial real estate amid the pandemic, Prindle said. Businesses like Walmart and Costco have seen upticks in sales as they face less competition.

But many other businesses will fold, he said.

"There are going to be a lot of restaurants and small stores ... that don't make it through this," Prindle said. "Businesses that were doing average to poorly prior to COVID, this is going to push them over the edge."

--Editing by Breda Lund.

For a reprint of this article, please contact reprints@law360.com.

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