What Investors Should Know about CRE lending and Investing in 2021

Posted On Monday, 04 October 2021 20:45

With the COVID-19 pandemic having caused super volatility if not downright chaos in the commercial real estate market (CRE) in 2020, investors had looked forward to a more stable if not prosperous 2021. What’s resulted is a real estate boom of “on sale” properties. 

CRE Lending & Investing Software Platform systems are said to have played a crucial role in all of this with its ability to provide more “out-of-the box” integrations with vendors, and for its talents at building web services and custom interfaces that include on-demand, real-time, rule-triggered and encrypted communication. But even with the release of the COVID-19 vaccines and a steady program of vaccinations, the pandemic has extended into 2021 which means investors aren’t quite out of the woods, so to speak.

Says the Federal Deposit Insurance Corporation (FDIC), insured financial institutions in particular have increased their exposures to CRE lending at a time when the market fundamentals still remain weak at best. Understanding portfolio risk means that bank supervisors must “get behind the numbers” and assess CRE lending practices to make a solid determination as to the extent of exposure, not to mention risk. These lending risks are said to extend to the residential market also.  

That said, here are three things CRE investors in 2021 should keep in mind when making investment choices. 

Affordable Housing Will Become Paramount In 2021

It seems there is always a need for affordable housing in an age where the dollar is not only shrinking in its purchasing power, but when wages aren’t even close to keeping up with hyperinflation. According to a new report, small-scale policies and efforts have been exacted by states and some local communities, but federal programs still lag behind. This is apparently changing, however.  

In the past few months, new lending guidelines have been disclosed by the Federal Housing Financing Agency (FHFA) on behalf of multifamily loan programs from government-sponsored bodies like Freddie Mac and Fannie Mae. With $70 billion slated for each agency, half of that funding will go to affordable housing and 20 percent of that targeted at rental units.      

Investors who are seeking to convert, developer, or purchase multifamily real estate in 2021 and 2022 might consider affordable housing projects, even if it’s just a portion of their CRE portfolio. This can increase the likelihood for the investor to be approved for long-term financing while helping to increase the supply of an asset that’s presently in high demand. 

Discounted Asset Sales and Distressed CRE Loans Are Rising

In a new report by Bloomberg, 20 of the biggest real estate firms, two of which possess more than $50 million in overall assets, filed for bankruptcy in December 2020. This comes on the heels of 236 more companies that boast $50 million or more in assets who filed for Chapter 11 at the height of the 2020 pandemic. The highest number since the housing market crash of 2008.

Standard & Poor’s stated that more than $45 billion in commercial mortgage-backed securities ended up being delinquent in 2020’s third quarter. 

CoStar Group researchers say that the estimates will be more than $126 billion in distressed commercial real estate being dumped in a “flash sale” between the fourth quarter of 2021 and well into 2022. This situation can extend to $321 billion in sales by 2025 as delinquencies continue to post-pandemic.  

In order to stay afloat, CRE businesses have been aggressively dipping into lines of credit or commencing with the sale of loans to help them meet mounting financial obligations while they anxiously wait for the CRE market to attain some semblance of normalcy. 

Sectors like hospitality, retail, entertainment, office, and multi-family properties in big cities like New York, Chicago, and Los Angeles are said to have miles and miles to go before “things balance back out.” What this means is, distressed sales will likely increase in late 2021 and early 2022 as more CRE companies have a tougher and tougher time meeting their financial obligations.  

What this means for investors: having some cash on the side to buyup discounted real estate can pay off for you in the long run. Also, experts will tell you to keep an eye out for real estate investment trusts (REITs) if you wish to make passive income/investment.

More Uncertainty is on the Way

With 2021 having ended up being an extension of 2020 in terms of market volatility and overall uncertainty, there’s a pretty good chance that some CRE sectors will see a strong resurgence as vaccinations proliferate and more people attain the freedom to travel and patronize their favorite businesses safely. But concerns still linger over mutations of the coronavirus that could lengthen CRE issues causing further reduced sales and outright closures.    

That said, CRE investors should hope for the best, but always be prepared for the worst.

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