Adapting to COVID-19 Realities in Commercial Real Estate Finance

Banks need to adopt real estate finance models resilient to COVID-like crises 

The COVID-19 impact on commercial real estate has been significant – social distancing and lockdowns have led to a fall in demand for many real estate asset classes like hotels, shopping malls and office complexes resulting in tenants requesting rent moratoriums. Inability to collect rentals is affecting owners’ ability to service debt obligations in turn negatively impacting the commercial real estate financing portfolios of banks. Given the COVID-19 pandemic is likely to continue into the medium term, some restrictions may well become the norm. In addition, successful experiments with remote working is convincing many companies to reduce their real estate footprint to save costs.

To counter the COVID-19 impact on commercial real estate finance, banks must:

• Alter their commercial real estate strategies by lending to resilient segments
• Recalibrate asset valuation models through more conservative policies
• Adopt stricter financial covenants to mitigate default risk
• Invest in automated valuation models and cognitive technologies