As we continue to charter unprecedented waters as a result of the pandemic affecting us globally, it becomes more and more difficult for both investors and lenders to price risk as a result. The uncertainty surrounding the short term and long term effects the epidemic will have on cash flow streams and ultimately the valuation of commercial assets, creates a backdrop of confusion. Asset managers are finding themselves constantly repricing risk and conducting sensitivity analysis in the face of multiple possible outcomes with very large standard deviations. In addition, the possibility of portfolios under performing due to deferred interest being PIK'd and creating negative equity beyond allowable thresholds compared to the NAV of the portfolio, is creating serious concern for commercial real estate lenders. As a result, we are seeing a backdrop that in some scenarios could be very similar to the 2008 credit crisis where lenders are potentially forced into re-modifications and possible foreclosures should the economy continue to worsen.
The disruption to tourism if prolonged could have a particularly concerning impact on hospitality, the short term rental markets as well as retail. One of the key elements that could positively stave some of the longer term effects comes in the form of possible government intervention in the form of liquidity to the lending markets for short term bridge and low rate government backed loans to small businesses impacted by the epidemic. Many lenders in the retail and hospitality sectors have begun to temporarily suspend lending until the situation can be assessed with more clarity. Expect lenders to continue to focus on defensive asset classes such as self-storage or assets with strong credit tenants and NNN leases which represent a more stable stream of cash flows, lower operating expenses and the ability to weather volatility. In addition, it's likely to see lenders have higher liquidity requirements in the upcoming months along with credit enhancement requirements like standby letters of credit or borrower guaranties for certain types of loans. Lenders are exercising caution and heightened awareness of the factors that could lead to a repeat of the 2008 credit crisis and are less likely to engage in opportunistic lending or with under capitalized borrowers and will favor larger established institutional borrowers over smaller "mom and pop" borrowers.
As we continue to receive and digest the information which seems to come at a break neck speed, its important to remember that there are still many possible outcomes including that of a short V shaped recovery that would have an impact measured in quarters and not in years. As the picture becomes more clear, lenders are likely to respond swiftly and resume lending activities albeit, in a more conservative manner. As investors, lenders and real estate professionals, we should remain calm and cautious as opportunities will inevitability present themselves once dust settles.