REFA Webinar Recap
COVID-19: How it’s Impacting the CRE Industry
Challenges – Implications – Best Practices
Presented by: Robert Allaire, CFO/Principal, Allaire Risk, LLC;
Paul Ayoub, Partner, Nutter; Jon Davis, CEO & Founder, The Davis Companies;
Wendy Fiscus, Partner, Nutter; Robert Palter, Senior Partner, McKinsey & Company,
Claudia Piper, Webster Bank, 2020 REFA President, Navjot Singh, Senior Partner, McKinsey & Company,
John Wolff, SVP/Real Estate Market Executive, Commercial Real Estate Banking, Bank of America
Top Takeaways from our Speakers:
Confusion about construction projects with City and State Regulations in conflict. 130 City of Boston construction projects stopped with $7 billion in value.
Construction is struggling with supply chain issues. Chinese factories have largely been open for the last week or two. Some Canadian factories are now getting back up and running if they have contractual obligations that pre-date the crisis that they need to fulfill.
Capital Availability coming into the crisis was very strong in the US banking system and has been available through the banks as businesses and consumers tap credit lines without issue. That said, capital will become more precious as this downturn persists in length and bank earnings decline from recessionary factors.
Debt funds will be severely impacted in the current environment due to higher exposure to impacted asset classes including hotels and retail and potential mark to market/covenant issues from funding sources; and loss of ongoing funding sources from banks and the CLO market.
CMBS has been impacted with new loan originations and issuance essentially shut down; will be on the sidelines until market certainty improves and bond buying resumes
Pricing of CRE Capital has widened considerably for both public and private debt and loan markets. Price discovery in process although there are fewer transactions so spread and floor requirements vary considerably. New loan originations in general will likely require significant spread increase of 100bps +/- with floors of 75bps+/-.
Regulatory Assistance: Interagency guidance from federal regulators this week encourages financial institutions to defer payments on loans impacted by COVID0-19 for up to 180 days. This guidance allows banks to work with borrowers who will have troubles meeting their requirements due to COVID-19, especially on hotel and retail loans, without these loans being accounted for as Troubled Debt Restructures (or impaired). Loans must be current prior to the crisis to be eligible for this type of modification and payment relief
Pandemics typically do not fall into Business Interruption Insurance. Landlords may also try to make claims under other sections of their insurance policies.
Force Majeure: There is only a small amount of case law on the subject of Force Majeure over the past 100 years and cases do not relate to pandemics. For any claim, the language must be closely reviewed to determine applicability. A governmental shutdown of construction sites would likely qualify as an unanticipated event beyond the reasonable control of a party. Even if a contract does not have express Force Majeure language, the common law doctrines of frustration of purpose and impracticability may apply. Keep in mind that even if Force Majeure does apply, that may only permit a delay in performance and not an excuse to performance.
Use of technology is at an all-time high, this event will drive further adoption. Challenges come with technology including privacy issues, less social interactions. Relationships will still prevail.
Anticipating a Q4 Recovery for CRE.