Commercial real estate market emerging from pandemic

Tim Whitney

As more and more businesses reopen, most major financial institutions and other experts forecast an economic rebound in the second half of this year. That’s subject, of course, to a potential second wave of the coronavirus.

As for commercial real estate, I don’t expect a reasonably short economic downturn — compared to past recessions that lasted for years — to affect values in the long term for most types of commercial and investment properties. 

As tenants rebuild their businesses and go back to paying their rent in full and on time, values for most industrial properties should reset to previous levels. The same applies to residential rentals once everyone gets back to work. Landlords using a blend and extend strategy with their commercial tenants likely will likely recapture some or all of their lost or discounted rent from April and May. 

On the other hand, restaurants, retail, office and especially hospitality will likely take the longest to make a comeback and might not begin to recover until mid to late 2021.

While commercial sales are starting to pick up again, one of the side effects of economic conditions is that lenders might require more money upfront if you’re looking to borrow. Under the “new normal,” your lender could increase your down payment an additional 5 percent to 10 percent, resulting in a loan-to-value (LTV) ratio of 65 percent to 70 percent instead of the typical commercial bank loan with a 75 percent LTV ratio. In addition, there could be a jump in the reserve amount required.

As the pandemic hopefully soon disappears in the rear-view mirror, I expect banks will feel more secure again and go back to their old ways of doing business.