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Despite the tumult the COVID-19 pandemic has caused throughout the commercial real estate industry and the uncertain business environment it has spawned, at least one Florida-oriented bank is continuing to entertain new lending opportunities around the Gulf Coast.
Valley National Bank’s commercial lending practice has been dramatically impacted by the health crisis, not surprisingly, and the Tampa affiliate of the New Jersey-based banking company is approaching new loans with added restrictions and covenants.
“There’s obviously some level of uncertainty that’s driving our business,” says Vince Chillura, a bank senior vice president who co-heads the bank’s commercial lending activities in Tampa.
“We’re responding by being somewhat more conservative than we have been, and by focusing primarily on historically successful partners that we know and trust. In general, there’s a higher risk profile than there has been in place for several years.”
The bank, which has roughly $39 billion in assets and had $30.4 billion in loans out at the end of the first quarter of this year, operates in four states: New Jersey, New York, Florida and Alabama.
In the Tampa area, the bank cut $650 million in commercial real estate loans last year, It has devoted in excess of $100 million in capital to projects like The Heights’ Armature Works mixed-use project; the 22-acre Midtown Tampa mixed-use development in the Westshore Business District; and the five-building Westshore City Center, formerly the Austin Center.
In response to the economic upheaval, Valley National is seeking additional equity for commercial real estate loans from borrowers, ranging from 5% to 10% more than the same time in 2019.
“It’s largely a function of the risk profile of both the customer and the asset class,” says Trey Korhn, a Valley Bank senior vice president who co-leads the commercial lending practice with Chillura.
“And it’s very deal specific.”
The bank’s evaluation of potential new loans also are increasingly being tied to specific asset classes.
“Hospitality has been hit pretty hard,” Korhn says, adding that new retail and senior housing projects have also become more difficult to underwrite in the present business environment.
Chillura notes the bank also is conducting greater market research and tenant due diligence than it has in the past and seeking more personal guarantees from borrowers.
The bank also has pushed loans’ debt-coverage ratios to at least 1.25 times, to ensure borrowers’ ability to repay debt.
“With COVID-19 and even in a post-COVID-19 world, we’re going to want to allow for some downside room” Korhn says. “So that we can make sure borrowers can cover their debt with some cushion so there’s not a strain on that aspect of their business.”
At the same time, the bank is grappling with less capital availability as a result of the virus and basis point spreads that are tighter than they have been in years.
It has also devoted considerable resources over the past three months to examining and approving federal Payment Protection Program (PPP) loans. Valley National has processed more than 12,000 PPP loan requests since the start of March, involving in excess of $2.3 billion.
“We can deal with an influx of loan requests, but they typically don’t all come in at the same time the way they did with PPP,” Korhn says. “It really distracted us from our typical day-to-day lending, but for now, we’re back to our day jobs, which is good.”
Just as unusual, the bank has received numerous requests from borrowers — especially in the retail and hospitality sectors — to defer loan payments.
“Most of the requests have been very reasonable, and the majority were absolutely warranted,” Chillura says. “Once we were able to certify hardship, we could actively work to help those clients.”
To certify the hardship, Valley Bank would ask borrowers for financial statements and other documents pertinent to their debt.
In many cases, the bank would offer borrowers loan deferrals of 90 days, or recommend principal balance deferments so loans would be interest-only for a period of time.
“On a case-by-case basis, we’d sometimes provide borrowers with longer deferments, based on their history, our relationship with them and other factors,” Chillura says.
In exchange, the bank would require a borrower pay a slightly higher interest rate or extend the maturity date of the loan.
“But there’s no forgiveness,” Korhn says. “It’s strictly a deferment, which is then added to the back end of the loan and it becomes due at maturity.”
Even with all the disruption caused by the virus, Chillura and Korhn say they’re buoyed by positive signs that the economy is rebounding.
New unemployment claims have fallen in recent weeks. Consumer confidence has increased in Florida after tanking in April, the height of the state’s outbreak. Interest rates remain at historic lows, and new loan requests have experienced an uptick in June, Korhn says.
The pair also expect certain commercial real estate asset classes — namely industrial and distribution properties and, surprisingly, multifamily rental projects — to thrive despite the virus.
Korhn says he expects the office sector in the Tampa Bay area to weather the proverbial storm well, too — even as may debate whether tenants will desire more or less office space into the future.
Chillura and Korhn also remain bullish about the future of the hospitality sector in the region.
“Measuring the past 30 to 45 days, things feel better,” Korhn says. “There are positive trends even in hospitality, especially beach properties and some destinations. People are traveling. It’s tough to say with any certainty what the near-term future is, but in the interim it feels better than it has.”
“It comes down to dealing with good real estate and good people,” Chillura says. “In the past 90 days or so, people have shown their true character, both good and bad. But we’re glass is half-full guys, and we’re optimistic that things will only get better.”
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