How is the State of Your Commercial Real Estate Portfolio?
Everyone would probably agree that there is some uncertainty in our current economic environment. While there are many unknowns out there, one impacting the banking industry is how will this impact the commercial real estate market? While it is a vital question, it is a difficult one to answer and may be premature to speculate.
According to a recent study completed by Deloitte (before the pandemic) respondents, while overall cautiously optimistic, have differing views about how the commercial real estate (CRE) industry will perform in 2020 and beyond. As you can see from the chart below, 76% were either Somewhat Optimistic or Very Optimistic for positive trends in CRE. But still, 10% were pessimistic of the future.
Regardless though, interest rate uncertainty will always have an impact or concern for the CRE market. Will rates go up? Or, with the current economic events, will they go down?
The geographic market has always played (and would continue) to have a significant impact on the CRE market.
Everyone should consider asking a couple questions about their CRE portfolios:
- Is there a tenant concentration in your CRE portfolio or is there a diverse mix?
- Do you analyze the tenants when writing CRE loans? Are you obtaining financial statements on the tenants or (at least) obtaining a business report on any tenants where you see a concentration? How do you analyze the anchor tenant of the property?
Property portfolios are exposed to tenant concentration risk where a single tenant may be present in multiple assets. So, if a tenant defaults, it will likely default in all properties that you financed where that tenant is present. As we know, rates of default often increase in times of economic stress.
Tenant expectations have also been changing. Creating superior experiences is not just about engaging the tenant, but also extending services to the end user, or the day-to-day consumer of that space, such as a retail shopping area or employee conveniences at the office. How many of you have seen a gym at an office building that is for the tenant’s employees’ use?
Most experts would agree that a real estate market correction is on the horizon. The real question is how far away is it? Is it two years, five years, or just around the corner due to the pandemic? What can you do in the meantime?
Below are five items that many financial institutions are currently doing.
- Evaluating Cash Reserves. Does your borrower have any cash reserve? Or, is their liquidity solely based on the sale of their latest commercial real estate project. Does that borrower have any true equity (cash equity) in their latest project?
- Reviewing loan terms. Examiners (and loan review teams) will likely expect you to review your loan terms and ensure nothing is missing.
- Completing big repairs and upgrades now. Does the property have deferred maintenance? If you believe a recession is on the horizon, you may want to coach your borrower to complete any deferred maintenance. Let’s get the repairs done sooner than later.
- Calculating the property’s break-even point. When you analyze a new CRE project, do you know what the break-even point is? Hopefully, that is part of the analysis you complete. For the project that booked / closed last year or 2 years ago, has that break-even point changed?
- Selling at the peak point. This is an obvious statement but sometimes hard to determine.
What can Baker Hill do for you?
Baker Hill offers a solution specifically designed to manage the risk involved with Commercial Real Estate lending. With Baker Hill NextGen, you can manage your CRE projects by:
- Gathering and analyzing the properties’ income
- Itemize and monitor the rent roll information
- Summarize and analyze the project’s occupancy and determine a breakeven point automatically.
- Conduct a sensitivity analysis on the property. Baker Hill’s sensitivity analysis report will show the impact on changes to the properties Vacancy Rate, Interest Rate, Cap Rate and Operating expenses.
- Automatically providing a user with a proforma income statement.
Posted on May 29th, 2020 at 2:40 pm
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