Vacancies in Commercial Buildings Creating Financial Woes for Lenders

According to a recent report in The New York Times, the coronavirus may serve as an unwelcome learning experience for national chains with restaurants and retail stores in New York City. Government-ordered closings, a dramatic decline in tourism and other virus-related factors may cause chains to rethink the future of their NYC operations. Lenders with outstanding loans secured by mortgages on commercial properties are concerned about defaults.

Lenders bet on the boom in commercial real estate

The obvious health implications of COVID-19 have been in the spotlight for months, but the story about its financial impact has been lurking in the shadows. Lenders that took advantage of a demand by developers, builders and buyers of commercial real estate in the years leading up to the pandemic dread what the future may have in store for them.

Loans on commercial real estate proving troublesome

Dismal occupancy rates at hotels, businesses closing their doors for good and corporations scaling back on the need for office space result in reduced rental income for building owners. Less rental income increases the risk that owners of commercial properties will be unable to pay loans secured by mortgages on their properties, which puts lenders holding those mortgages at risk of borrowers defaulting.

Banks confront reality of at-risk loans

Lenders that originated loans with a 50% loan-to-value ratio might have been safe had it not been for COVID-19. Banks have increased reserves in anticipation of incurring losses on their loan portfolios, and real estate investors holding commercial mortgages have begun foreclosure proceedings against commercial borrowers.