Lenders Rethink Assumptions as Pandemic Rages On

Amid the pandemic, lenders are still looking hard at industrial, multifamily and some office deals.

But beyond that, other asset classes are drawing interest—and in some cases lenders are even willing to stretch their comfort level. For instance, James Millon, vice chairman, Debt and Structured Finance at CBRE, said on the company’s “The Weekly Take” podcast that his firm participated in a life science conversion of a traditional office building at 345 Park Avenue South in New York City. 

Millon says lenders did not understand the infrastructure required to attract the lab tenants and that a life science project could exist outside of a traditional hub, like Cambridge.

Like others, Millon sees life sciences projects emerge in nontraditional markets, like Chicago, Atlanta, Dallas and Philadelphia. These metros provide access to talent, scientists and researchers and close in proximity to hospitals. He says many real estate owners are considering life science uses if their buildings work for a conversion.

While life sciences are currently hot, people are cooling off of other sectors. Millon says investors need to distinguish between short- and long-term risk in a sector. If lenders and investors believe in an asset class and a location, a deal will have plenty of financing solutions. But if something has changed around an asset class, like buyer behavior or government regulations, the conversations shift.

“I think it’s a far more difficult conversation with a client when there’s an asset class that structurally something has changed out there,” he says.

Millon says he has had a couple of issues with senior housing assets. Lending to a senior housing facility that has had COVID deaths could potentially provide a reputational risk for lenders. “Frankly, it’s just better to wait things out, let the storm blow over and start financing these asset classes again,” he says.

There is still available capital for owners who need help, though it may be more expensive than alternative lenders with more of an equity mindset, according to Millon. These groups will provide bridge financing temporarily because they believe in a certain asset class’s long-term viability.

For construction projects, it may be more difficult to find capital, according to Millon.

“There have been many lenders that have frankly stepped away from construction projects, and that’s created a supply-demand imbalance and liquidity deficiency,” Millon says. “And so we have to search far and wide to find capital that’s financing these types of projects. And because of that, it’s more expensive capital. We’re having to dip into buckets of lenders and capital that we haven’t had in the past.”

Overall, Millon says the market is “in the first few innings in terms of availability of capital.” Right now, he says the cost of financing is roughly double what it was before COVID.

“Yes, it’s available,” Millon says. “It’s getting better by the day, literally, but it’s still very expensive—far more expensive than it was pre-COVID.”