• Sun. Aug 7th, 2022

The world may remember 2020 as the year “normal life” was torn apart by the coronavirus pandemic.

But for many US commercial real estate owners, the big deal hasn’t even started.

“I think it’s going to be a two-headed monster,” Pat Jackson, CEO and founder of Sabal Capital Partners in Irvine, Calif., Said of the outlook for distressed commercial buildings.

“Some assets will recover and do well. Obviously, we’re very bullish on the long-term multi-family, ”said Jackson, a lender and investor in billions of dollars in assets damaged in the last recession. “On the other hand, there’s a lot of distress, and it’s coming.”

Jackson sees properties “running out of track” after nearly a year of business disruption. And as the government rushes to distribute vaccines, lockdowns in the United States have intensified in the colder months as COVID-19 cases, hospitalizations and deaths have skyrocketed.

The resurgence of the novel coronavirus has fueled fears that a V-shaped economic recovery is now out of reach, while raising concerns that banking regulators, worried about potentially growing risks to the financial system, could crack down on banks and others exposed to bitterness. immovable.

The global stakes have never been higher. Data from the Federal Reserve shows that U.S. commercial real estate debt hit an all-time high of $ 3.06 trillion in the third quarter, down from a 10-year low of $ 2.2 trillion in 2012.

“The second wave of COVID hasn’t helped anyone,” said Lisa Pendergast, executive director of CRE Finance Council, a commercial real estate finance group.

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Pendergast pointed to the 10.2% lending in the commercial mortgage-backed securities (CMBS) market of nearly $ 600 billion that, in November, was on “special duty,” a category that is often the first stop for borrowers looking for temporary or permanent debt. relief.

This is below the peak of 12.6% following the 2008 global financial crisis, which took about two years to reach. But the volume of problem loans could easily increase as the pandemic spreads and more borrowers face its fallout, including how the use of commercial buildings ends up changing.

In a sign of the times, New York City’s teetering commercial real estate sector recently put forward a proposal to turn approximately 1 million square feet of Manhattan office space into housing, The New York Times reported, with the goal of transforming approximately 1 million square feet of Manhattan office space into housing. ‘avoid a potential collapse in house prices.

To verify: Ho, ho – oh, no! The values ​​of distressed commercial properties in Manhattan fall 53%.

Large homeowners have also become a focal point because, unlike home loans held by banks and insurance companies, the CMBS market makes it easy for Wall Street borrowers to vacate their properties if something goes wrong.

“You can just return the keys,” Pendergast said of most of the properties funded by CMBS.

A roadmap for distress

For decades, the CMBS market has been a key corner of finance in which loans for hotels, offices, industrial centers, and other commercial properties are aggregated into bond transactions and sold to investors, including funds from pension and bonds.

While not the largest source of financing for commercial real estate, CMBS attracts borrowers looking for non-recourse debt, which means that if a property breaks down or ends up under water, a lender cannot go after the operator’s other assets. to recover losses.

“Keep in mind,” Pendergast said, that “a lot of borrowers, if they got an asset five, six, or seven years ago, they’ve probably made a good return on their equity and realized a profit “. Some will say, “Take my property. “

Read: Simon Property abandons four shopping centers in difficulty. Why more could follow.

This has rarely been the case this year. Troubled sales made up only about 1% of all commercial property sales over the past two quarters, according to Real Capital Analytics, although it will more likely come.

Analysts led by John Sim at JP Morgan have laid out a potential timeline for CMBS loans and distress, including key relief program expiration dates, after a deluge of homeowners fell behind in so March. that a national emergency has been declared.

Liquidation is expected to begin later this year

Properties to watch out for

While it may be easier for CMBS borrowers to get rid of their debts, high-profile issues often don’t go away quietly.

Indeed, bondholders receive monthly property performance reports that track specific distressed malls, iconic hotels, and even the decline of a landmark Times Square building funded by President Trump’s son-in-law. in the months leading up to Trump’s inauguration.

Jared Kushner co-signed loans to fund 229 West 43rd St., an 18-year-old property that once housed the New York Times, in October 2016, before becoming a White House adviser.

It is one of some $ 1.1 billion in home loans now considered distressed in Times Square, according to real estate data platform CREDiQ. And its latest real estate appraisal reduced its value by 80% to around $ 92.5 million.

“It was kind of a revelation to see how much the value had fallen,” said CREDiQ co-founder Bill Petersen. But he also believes the property’s woes don’t necessarily reflect the value of other buildings in Times Square, he said, given the building had lost significant tenants even before the pandemic.

Kushner Properties did not respond to a request for comment.

Record debt of the CRE

Ryan Severino, chief economist at commercial real estate company JLL JLL,
Remains optimistic, he said, that parts of the market will recover over the next 18 months or so if a successful COVID-19 vaccine can soon begin to be widely distributed.

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But Severino said he also sees an uphill battle for properties that were struggling before the onset of COVID-19, or in his words, buildings that “after more than 10 years of economic expansion” have failed. managed to find a foothold, including substandard malls and offices. buildings in less desirable areas, which have languished since the last recession.

The global stakes have never been higher. Data from the Federal Reserve shows that U.S. commercial real estate debt hit an all-time high of $ 3.06 trillion in the third quarter, down from a 10-year low of $ 2.2 trillion in 2012.

CRE debt breaks record

Saint-Louis Fed data

Some real estate debts will be repaid without a hitch. Other owners will find debt or equity to weather the storm.

But the pandemic still means that some properties sold will only reach fire-rated prices. And that is the hope of bargain hunters.

“It’s really good when everyone is looking for opportunities,” said Gayle Klein, director of the McKool Smith law firm, which represents hedge funds, private equity and others on commercial and securities litigation. “Because my clients have money to spend. “