Want to scare an investor, developer, buyer, or owner in CRE looking for a new loan or refinance? Try the words “recourse only.”
If everything beyond the value of the property is on the line, to what degree will the asset class be considered more trouble than it’s worth?
Not to panic, because this doesn’t appear to have become a widespread issue. At least yet. However, a June quick hit from Colliers on lenders tightening credit — hardly a surprise to industry pros — included a warning that hasn’t been part of the CRE lexicon in years.
“Recourse is becoming part of the conversation again due to various factors,” wrote Aaron Jodka, research director for U.S. capital markets at Colliers. “These include the instability in the banking industry beginning in March, a lack of loan churn (elective refinancing has dried up), and increased capital requirements.”
There are more than enough conditions to leave lenders wary. Here are some headlines that GlobeSt.com has reported recently:
- PGIM CEO Expects 60% of Office Buildings to Enter Purgatory
- CMBS Delinquency Rates Reach What Might Be the Beginning of the Great Slide
- Capital Markets Continue to Thwart CRE Professionals
- Even Mixed Use Is Turning Up in Special Servicing
- This Multifamily Developer Had to Approach 48 Lenders About One New Project
- Investor Purchases of SFRs Are Down 49%
- A Closer Look at Property Prices’ Downward Trajectory
“Through May, CMBS issuance declined 75% from the same period last year, while the number of deals dropped 66%, per Trepp,” wrote Jodka, tallying more of the concerning data. “The Fed’s latest lender survey shows a clear upward trajectory of tightening lending standards. The net percentage of lenders doing so rose to 73.8% for construction and land development, 66.7% for nonfarm nonresidential deals (commercial), and 64.5% for multifamily. These are the highest levels seen since the third quarter of 2020 amid the pandemic.”
The potential for even major property owners turning over the keys to lenders when a refinance doesn’t seem a smart investment for them is now a reality. The lenders can’t afford for this to happen in any scale because values are falling. Recovering the full value of a loan — often in interest-only payments — drops and no one wants big hits to their balance sheets.
Furthermore, the lenders aren’t in a good position to maintain and run properties. They need to unload them, which would likely mean dropping valuations, which could then reach out and potentially undermine the values of other properties. If recourse is coming up in business discussions now, it could become an increasingly appealing demand for lenders, who don’t want to be left holding the bag.
If it wasn’t a scary time in CRE before, it should be now.
Source: GlobeSt
