COVID Impact on Commercial Real Estate Calls For Nuanced Approach

How Is COVID-19 Impacting the Commercial Real Estate Market?

In a time of mixed fortunes for the commercial real estate sector, Argo Pro is taking a nuanced approach to risk.

Chicago Cityscape at Dusk Illinois USA

By Nick Shatraw, Assistant Vice President, Argo Pro

Within Argo Pro’s financial institutions division, the team offers D&O and E&O products for a broad range of commercial real estate clients, including real estate investment trusts (REITS), private real estate funds and real estate operating companies.

These companies can invest in and operate a variety of commercial real estate sectors, including hotels, office buildings, industrial warehouses, multifamily housing properties and shopping centers.

Variety across real estate calls for thoughtful, nuanced approach

Within real estate – especially commercial real estate – the risks and issues faced by clients are varied and more nuanced than one might assume. This applies particularly to the impact from COVID-19, which has manifested in different ways across the sector.

While shopping malls and hotels have clearly suffered from low foot traffic and diminished occupancy rates, other areas are doing well. Industrial REITs and distribution warehouses, for example, are benefiting from the boom in e-commerce, while multifamily complexes are quite stable.

This variety is why it is important for us at Argo Pro that commercial real estate risks aren’t simply bundled into one bucket and treated all the same. It is critical that we are thoughtful and considered in our approach, taking into account the nuances that each client faces.

“Our brokers and our clients trust us to take a thoughtful and appropriate approach, ensuring a committed partnership in the long term.”

We must be honest – there are, of course, harder hit areas of the sector, where we need to take appropriate action due to simple bare commercial realities. Our underwriters must look at the liquidity risks, which is where COVID-19 has been impacting areas such as retail centers: Tenants filing for bankruptcy create knock-on effects on the center’s revenue. Some REITs may be facing problems due a lack of access to capital, and while government-sponsored loans have been a helpful bridge for some companies, they have not been a universal solution.

Moreover, a significant COVID-19 impact of the hospitality industry is that occupancy levels have been very low, leading to sharp declines in revenues. This could lead to liquidity issues for an REIT and potential issues servicing their debt.

What kind of risks is Argo Pro looking at?

There are many companies with solid balance sheets and under-control debt levels who will weather the storm successfully. At Argo Pro, we understand that clients’ revenue is being hit, and there are a limited number of levers they can pull in difficult circumstances. But we look for clients with a good track record who can demonstrate that they’re not overly leveraged – that they can service their debt and have access to different forms of capital.

It is no secret that certain sectors have been hit really hard over the past year. The D&O market was already hardening and seeing rates rise pre-COVID-19, but the pandemic has exacerbated that and caused many carriers to reduce capacity and raise retentions.

At Argo Pro, it is important for us that we look at both macro and micro trends – we consider the overall industry but are also very cognizant of individual company circumstances.

Argo Pro takes the long view

Importantly, we have a strong team of underwriters who have excellent technical expertise and have been underwriting through various real estate market cycles. Our track record so far shows that we are in this for the long term, and we have growth aspirations that ensure we’ll remain a stable, committed partner.

Sometimes it’s unavoidable that underwriting actions need to be taken. Rates may rise, self-retentions may increase and terms may be tightened, but we work through the issues with our clients and have sensible conversations with them about our rationale.

As you would hope and expect, we aim to underwrite risks appropriately. In turn, our brokers and our clients trust us to take a thoughtful approach, ensuring a committed long-term partnership.

For more details on Argo Pro commercial real estate products, go to https://www.argolimited.com/argo-pro/product/.