June 4, 2020 – Nancy Ferrell, Managing Director, NorthMarq; Spencer Perry, Vice President, BB&T now Truist and Barbara Simmons, Group Vice President, M&T Bank gathered (virtually and from a safe distance) to discuss challenges being faced by financial institutions in light of COVID-19, as well as offering their perspectives and predictions concerning the road to recovery and positives that can be drawn from experiences over the past several months.
BECAUSE NO ONE HAS WORKED THROUGH A PANDEMIC BEFORE, WHAT GUIDELINES HAVE BEEN IMPLEMENTED WHEN SIFTING THROUGH RELIEF REQUESTS?
NANCY FERRELL (NF): From the perspective of life insurance lenders, they are requiring a formal written request to the lender for deferral or forbearance. This includes information detailing the cause of loss, expected time frame for loss and the typical documents including operating statements for the past three years, the current operating budget and rent roll. Each request will be considered on a case-by-case basis and borrowers should understand that life companies may have to hold back additional capital on modified loans.
BARBARA SIMMONS (BS): The federal government allows financial institutions to offer a “payment holiday,” called a Tier 1 Mod, for up to six months and to defer the payment of principal or principal and interest all based on demonstrated need during this period. M&T Bank has taken a collaborative approach to working with and helping our clients based on the unique needs of each client. We continue to work through this process in making sure clients get the relief they need on the debt service side in order to allow its CRE clients to proactively work with its tenants to see them through this period of uncertainty with little tenant revenue flow in some cases.
SPENCER PERRY (SP): In certain cases, we are offering a 90-day payment deferral and are working with companies collaboratively to arrive at workable solutions. It is not in the best interest of anyone to play hardball. If 90 days does not provide enough time, we will consider allowing an additional 90 days or other customized loan modifications when needed. Our regulators have empowered us to provide short term payment deferrals without needing to classify the loans as TDRs (troubled debt restructures).
DESCRIBE YOUR LEVEL OF OPTIMISM FOR THE RETURN OF DEAL FLOW IN THE THIRD OR FOURTH QUARTER.
NF: Deal flow will be triggered when relief requests subside. That being said, most life lenders are on the sideline or have quotes at 30-50% leverage. Most commercial borrowers want leverage to be at least 65% loan-to-value (LTV) or higher. The days of 75% LTV will happen again but very slowly and the advantage will be to the known borrower with whom the lender has done many deals. That being said, deals have not stopped as we have closed several loans in the past several weeks.
BS: We maintain cautious optimism for the second half of the year, but our priority at this time is focused on client protection and relief efforts. Echoing Nancy, we continue to close loans and have been throughout this pandemic period for certainty of deal execution. Although spreads have widened due to increased liquidity premiums and deal structures have taken on a different look, we continue to maintain our commitment to deliver capital to our CRE clients and deal execution. Above all else, our goal remains protecting our client base.
SP: Although the pipeline has slowed, there are deals out there and we intend to revisit opportunities once things settle down a bit, which we believe will start in the third quarter. The Baltimore-Washington, D.C. region remains robust and we have no reason to believe the environment will change dramatically. Taking care of our customers remains our priority.
WHICH REAL ESTATE PRODUCT CATEGORIES DO YOU EXPECT TO SPRING BACK TO LIFE FIRST?
NF: Industrial, multifamily, commercial office and retail in that order. Industrial remains strong and in demand. Class B apartments are essential but student housing will be disrupted if there is a delay in the re-opening of colleges this fall. Office will likely transform in different ways as people will work from home – possibly part-time.
BS: Distribution has raged stronger based on the storage and inventory needs of national companies such as Amazon. Apartment inventory will continue to be strong, particularly in affordable workforce housing as well as Class A product. As for office, when situations like these arise, creativity blossoms and I expect to see this as it transforms itself in different ways. Telework situations only work so well as nothing replaces being in the moment with human presence. Buildings will be retrofitted and re-imagined in response to the new way companies will operate within the office sector.
SP: Industrial has never really gone away, with the need for last mile warehouse and cold storage taking on increased importance. People are spending more money in grocery stores so we expect restaurants to struggle for a greater period of time. In the hotel sector, limited service models are expected to bounce back more quickly as opposed to those that are more reliant on banquet and conference spaces.
WHAT IMPACT HAVE FEDERAL GOVERNMENT STIMULUS PACKAGES HAD ON THE OVERALL BUSINESS ENVIRONMENT?
NF: Extremely helpful, but my fear is that it still might not be enough for small businesses to survive.
SP: The programs have provided us with room to operate and it is comforting to see that the Federal Reserve has pledged unlimited support throughout this crisis. What we are dealing with currently is not a systemic problem, which also provides reason for encouragement. Although the PPP funding has helped immeasurably, we are all wondering if two and one-half months is enough time to achieve recovery.
BS: Kudos to the federal government for rolling out various programs so quickly to try and aid struggling businesses. Programs from the SBA PPP, MSLP, various state and local municipality emergency response funds all gave businesses some relief with ongoing future and ongoing support pledged by the government. Although each program rolled out in record speed with not every fine detail addressed, the right intent was present to aid businesses in helping to stabilize its workforce and cash flow. For example, when it came to the SBA PPP program, M&T shifted and trained every employee to attend to the swift application and processing of the SBA PPP loans.
WHAT POSITIVES HAVE EMERGED FROM THE COVID-19 CRISIS?
NF: People have learned to work remotely rather effectively although that may not be such a good thing long-term for the commercial office sector. With many adult children returning home to weather the storm, it has provided the opportunity for families to connect.
BS: The situation has demonstrated the high level of resiliency, gratefulness and grit within people and our relationships. They have turned from within to help each other and this positive attitude has been infectious and inspiring. We are speaking with clients on a more regular basis now and not just about business and the importance of a relationship. We talk about family, health, kids, stress and overall well-being. Community investment and volunteerism has sky-rocketed and, even though we are quarantined, people have figured things out.
SP: We have found that, above everything else, relationships really matter the most.