Lenders Take Note of Hopeful Signs for Office and Retail

Going into the pandemic, there were a lot of questions about the future of brick-and-mortar retail.

“We had a lot of the uncertainty underwriting, the national retailers [before then pandemic],” says John Hofmann, commercial production team leader for KeyBank. “We wondered who would survive.”

For banks, uncertainty isn’t a good thing.

“We don’t love uncertainty,” Hofmann says. “Pre-COVID, there were still question marks around the viability of certain retailers.” 

Then the worst-case scenario happened. Stores closed, and people went online to make purchases. In 2020, consumers spent $861.12 billion online, which was a remarkable 44.0% year-over-year jump from 2019, according to Digital Commerce 360 estimates.

“The baby boomers and the people that hadn’t adapted to things online were forced to do that,” Hofmann says. “They were the more susceptible group of people. So it just accelerated some of the trends we saw in retail.”

COVID forced some retailers to restructure their balance sheets. But, now, the retailers that made it to the other side have shown the resilience to stick around.

“Now, you feel like there are fewer question marks because we’re on the other side,” Hofmann says. “If a retail center performed well in COVID and the retailers were strong in COVID, we feel good. We see less uncertainty on the retail sector than we did pre-COVID.”

Banks should now have more confidence to underwrite retail space.

“Now people feel there is less of an uncertainty around the asset class,” Hofmann says. “Now, you can underwrite what it is. You’re on the other side of COVID. If the retail center survives COVID, you feel pretty good about what it looks like.”

Hofmann also expresses optimism about the other sectors hit hard by COVID, though they weren’t facing the same issues as retail.

“For hotels, we anticipate a strong demand to travel,” Hofmann says. “Leisure, of course, is bouncing back.”

Hofmann thinks conferences and business travel will follow the recovery in leisure travel. In projecting hotels, Hofmann believes it is important to look back at cash flows in 2017, 2018 to 2019 and then pick the level where normalized demand will land coming out of the pandemic. 

“On hotels, we see appetite return,” Hofmann says. 

Now that employers are starting to return to the office, Hofmann says debt providers will get some clarity in that sector.

“We’re starting to understand better what the new footprints look like for office tenants and are able to underwrite that,” Hofmann says.

Hofmann expects to see slightly more robust demand for office in the high-growth markets. “There could be some shrinking footprints from office users, but that would be offset by job growth,” he says.

In the markets where job growth is lagging, Hofmann says lenders are utilizing more stringent underwriting guidelines and pulling back on cash flows. 

“Across all the asset classes, you’re highly focused on cash flow and rent relief,” Hofmann says.