Commercial Real Estate Update – Up To The Lenders Now

May 14, 2020

commercial office space I hope everyone is healthy and hanging in there! Today we are going to look ahead to where decisions about commercial properties ultimately lie, with the lenders. What are lenders? They are typically banks but can be lots of things including institutions, venture capital firms, credit unions, private equity firms and so on. Bottom line is they are the last line of decision making and let’s look at how commercial property owners get to them.

It all starts with tenants that don’t pay their rent on their commercial (retail, office, industrial or multifamily) property. Assuming it is a significant amount (multiple tenants not paying or a couple of really big ones), the landlord is faced with choices. He can work with the tenants on coming up with something that will allow them to continue on a discounted rent and or renegotiated lease, he could give concessions such as free rent, delayed rent or a combination of these. However if the landlord has a loan he has an agreement with a lender and it can only be changed by getting permission from the lender. If the landlord makes decisions without the approval of the lender he is in default of his loan and in a position to lose the property to the lender. And as you can imagine, they are very busy these days and extremely difficult to get in touch with, perhaps intentionally. While we aren’t there yet, I anticipate that the ball will be in the lenders court soon enough if it isn’t already. A major recession is coming our way as much as it pains to me to admit, so we better take all the precautions we can now.

This is the time in the economic cycle that the banks become flush with properties and then are forced to sell them at significant discounts that then negatively affect other properties in the area because they can price at below market rents. This is playing out right now and will increase in velocity as we get into the 2^nd wave of virus infections which is coming very soon. When that happens we can finally get to the bottom of the market and begin working our way back up. Until then it is very hard to valuate properties and even businesses. I am advising clients to hold off until we know where the market is so they don’t overpay on a lease or purchase. As always thanks for reading, stay safe and have a great day.