Monthly Archives: July 2020

How Lenders and Investors are Changing Their Underwriting Assumptions

By: Adam Horowitz

Lever Capital Partners is speaking with lenders and investors on a daily basis and have been hearing that changes in underwriting are at the forefront of their minds. The number one question capital providers are asking is, “In the current post-Covid world, what changes have you made in your underwriting assumptions?”. The conversation is a non-starter if the sponsor has not thoroughly thought through these changes and can’t clearly point to adjustments made in the proforma with a compelling story to back it up. Here are a few of the major underwriting changes we’re requesting from our sponsors (for now) and our recommendations about how to present them to the market: 

  1. Cap Rates – Needless to say there is pricing uncertainty in the market (investment sales volume has dropped roughly 70% in Q2 2020 from the same period in 2019, according to CoStar and RCA Data). Pre-Covid comps are being ignored so it’s important to factor in a conservative premium to appease investors. Recently, we’ve seen value adjustments of 10%+ for multifamily properties up to 30%+ for hospitality, depending on the specific asset. Don’t be shocked when looking at your updated IRRs.
  2. Rent Growth – Underwriting future income streams poses a considerable challenge for most properties without long term leases or credit tenants in-place. Across the board, investors are underwriting untrended rents and factoring in zero rent growth for the next 2-3 years. In rare instances, some markets are projected to have a negative rent growth rate over the next 1-2 years. Where you build / purchase will be heavily scrutinized now.
  3. Exit Cap to Yield on Cost – In regular times we’d typically look for untrended yield on cost spreads of 150 basis points compared to the exit cap rate. The industrial and core multifamily spreads are holding close to those numbers but we’re seeing a much wider spread for all other asset classes. Be prepared to show numbers in the 175-200+ range.
  4. Spec Development – Building spec has always been a challenge, even in the most bullish of times. Office and retail have required a fair amount of pre-leasing even in the early part of this year. But now, given the circumstances, nothing is going to happen unless you are heavily pre-leased with credit tenants in tow. Walking into the lender’s office with a mask and a dream won’t cut it, so start lining up those credit tenants.
  5. Debt Assumptions – The lending world has dried up considerably with some participants leaving the market (debt funds) and others on the sidelines only willing to lend to existing relationships (banks). Overall, leverage has decreased with developments maxing out at 65% and more commonly in the 50-60% range while interest rates spreads have widened, increasing all-in rates. You’re likely going to need more cash, and investors are much more focused on the debt status than ever before.

Without these adjustments, most lenders / investors will take a quick pass. Your ability to identify and edit your original underwriting shows you’re adapting to the new normal, have an understanding of what metrics had to change and are able to craft a workable solution around the modified numbers. To come off as a sharp sponsor and on top of the market, we recommend having your changes ready to present by (1) preparing a doc that outlines your changes that you can share with investors and lenders and (2) crafting a compelling story for the asset and market that you can talk through.

These are the first things we ask for when looking at new deal packages. If you follow the above rules you might be one of the fortunate few to get a new loan or investor equity. We can help when you’re ready to “turn and face the strange” as Bowie said. We’re home working in our PJs waiting for you to call.

Which of the 4 Food Groups are Safe to Eat this July 4th?

By: Aaron McGinley

There have been many changes to the commercial real estate sectors largest food groups since Covid-19, some are temporary and some will be here to stay. Below we share some statistics and our thoughts on which property types you should devour and which ones to avoid as we hit this very unusual July 4th weekend. We’ll list the sectors from 1-4, ranked as the number of turns left on the BBQ until it’s ready to eat.

Multifamily (1 turn left)

Multifamily is poised to recover better than other sectors for a few reasons. The sector had strong momentum going into the Covid crises and as heard on a recent webinar, “you can’t sleep on the internet.”  Per CBRE, vacancy is expected to rise 3.1% from from Q4 2019 (4.1%) to Q4 2020 (7.2%) but fully recover by the end of 2021. Similarly, rents are projected to drop 8.1% in 2020 and fully recover by Q1 2022.  

However, that doesn’t mean there won’t be changes.  People will live where the jobs are and the changing landscape of the “work-from-home” era might affect the long-standing trend of people moving closer to big cities.  We think the so-called 18-hour cities that have job growth, lower taxes, less traffic, and a cost of living that provides the ability to work from home will benefit more than the largest US cities.

Industrial (1 turn left)

Industrial is another palatable menu option.  Although COVID is suppressing the macroeconomy and may experience a brief downturn through 2020, the shift toward social distancing has encouraged e-commerce spending, providing some protection for the industrial sector over the next few quarters. Over the long term, it’s expected that e-commerce will largely maintain its gain in retail share and businesses across the economy will look to carry larger amounts of inventories, boosting industrial demand.

From Lever Capital’s perspective, strong sponsors who can pre-lease or pre-sell industrial will be one of the most attractive asset classes for both debt and equity markets given the strength of e-commerce spending. Everyone will try to enter this space without the knowledge or relationships to get these deals done. We’ll encourage new entrants to partner with experienced groups.

Office (2 turns left)

Office still needs a few more turns on the BBQ before it’s fully cooked.  However, according to CBRE, despite the staggering rise of unemployment and negative GDP figures, 9 of 10 respondents to a Bureau of Labor Statistics survey considered themselves on a temporary layoff.  The office sector benefited from a fast adoption of work-from-home policies. Looking forward, the U.S. office sector most likely will not be able to go through the current crisis unscarred. New office densities and the magnitude and duration of work-from-home regimes is still not ready to eat.

It’ll take a while to determine the level of hurt this sector will take as tenant leases roll over the next year. The opportunity here exists on the distressed side, having a tenant lined up to occupy a vacant building, or repurposing to industrial.

Retail (Overcooked)

The impact of COVID-19 has put additional pressure on the retail industry. According to CBRE, the overall availability rate is expected to rise and reach its peak in Q1 2021 at 12.5%, or 380 basis points (bps) higher than the Q1 2020 level.  Rent is forecasted to reach its trough at Q2 2021, with an 8.5% decrease compared to Q1 2020. This is a challenging time for retailers as many close their stores and more retail space becomes vacant or converted to other property types.

Lots of our friends and clients admit that the country was already “over retailed” and given the shift to e-commerce for some products that previously were dominated by brick and mortar it’ll feel even more-so.  However, with retail sectors being impacted so differently, their recoveries will have different trajectory paths.


The U.S. Real Estate sector will look different this 4th than in years past and some food groups appear to be more appetizing than others.  Multifamily and industrial are poised to recover in short order, while office has some cooking to do and retail has already been burnt from sitting on the grill for too long and may need to be replaced with a fresh dog.

We’re Here to Help

Lever Capital Partners is a boutique capital intermediary with deep relationships in the debt and equity capital markets for commercial real estate. To learn more about our services or if you have questions about capital, reach out to us and we will evaluate your project.