Hoping to take advantage of the wrecks after the coronavirus pandemic, investors are preparing to buy commercial real estate at rock-bottom prices.
Long before states and cities closed stores and placed orders to stay at home, many real estate funds stored cash and waited for a buyer’s market. Some have raised billions of dollars in the past few weeks.
As a result, Blackstone Group, Kayne Anderson Capital Advisors, Starwood Capital Group and other investment firms have available equity of approximately $ 300 billion, said Douglas M. Weill, founder of Hodes Weill & Associates, a global real estate capital advisory firm in New York . For comparison, according to Real Capital Analytics, a commercial real estate researcher who tracks transactions starting at $ 2.5 million, real estate sales in 201
“It’s an amazing amount of dry powder,” said Weill. “Institutional investors are defensively taking care of their own portfolios, but they’re starting to look for opportunities.”
This is the second time in the past twelve years that investors have anticipated a surge in real estate discounts. The 2008 financial crisis has also led to an increase in non-performing funds. But many who had started up during the Great Recession hissed because the expected depth and breadth of the need never materialized.
Will it be different this time? Just like in the last crisis, when government intervention, loan changes, and other measures drove down the street until property values recovered, lenders and regulators hope to take similar measures, including trillions of dollars into the financial system.
In many cases, lenders are trying to respond to borrowers’ requests to suspend loan payments for 60 to 90 days in order to make long-term changes later, said Jay M. Sakalo, a Miami-based lawyer specializing in financial restructuring.
By April, more than 5,000 borrowers, representing 17 percent of $ 583.8 billion in commercial mortgage-backed securities, had asked for leniency or other relief, according to rating firm Fitch Ratings. Unlike bank and insurance company loans, commercial mortgage-backed securities are pools of real estate loans that are risky and sold to investors.
“The idea is that if we can take the break, we will do less damage than saying to borrowers,” You have to pay no matter what happens, “said Joe McBride, director of commercial real estate finance at Trepp, a research firm in New York: “Foreclosures don’t have much to offer.”
States and cities did not cease economic activity during the financial crisis, however, and most tenants still paid rent. This time, however, this is not the case. Around 38.6 million people have submitted unemployment claims, according to the information A report from the Department of Labor was released on Thursday, and millions of small businesses and restaurants are expected to close permanently.
Retail and hospitality suffer the most. For example, Macerich, a shopping mall owner based in Santa Monica, California, has collected 26 percent of his April rental, according to his latest financial report. Early May rental income fell to 18 percent. And although hotel occupancy has increased again in recent weeks, according to STR, a research organization for the hospitality industry in Hendersonville, Tenn, it was still around 56 percent lower than in the previous year.
The situation is one that tenants and landlords probably never expected, and for many companies survivability remains an issue.
Barton Perreira, a high-end eyewear brand based in Irvine, California, whose products will be featured in the next Bond film, has recently reopened its stores in Aspen, Colorado. Kansas City, Mo .; and Nashville on a limited basis, but its New York location will remain closed, said Bill Barton, a founder. He admitted that the landlords were in a difficult situation and expected pedestrian traffic to decrease over the next six to eight months, which exacerbated the financial challenges of the closings.
“I think tenants have to decide whether to challenge it and landlords have to decide whether to keep a particular business,” said Barton. “But at the end of the day, it’s difficult to say that if we can’t get help from landlords, we’ll go ahead.”
In mid-May, loan servicers, representing 70 percent of commercial mortgage-backed securities, said that 19.3 percent of hotel loans and 10 percent of residential loans were delayed more than 30 days, according to Trepp. The end of the grace period could significantly increase these percentages, Trepp noted.
According to Green Street Advisors, a commercial real estate research and consulting firm in Newport Beach, the value of accommodation has dropped an average of 16 percent in the past three months, while the value of shopping centers has decreased by 25 percent and strip retailing by 15 percent. According to Green Street, commercial real estate values fell by an average of 10 percent during this period.
Some property owners who cannot withstand a downturn already want to sell. Given the widespread expectation that property values will continue to decline, experts say that there are only a few willing buyers on the market.
Every commercial property owner has their specific problems, but mom and pop landlords who own a handful of homes, retail centers, or other assets are in a much more vulnerable position, said Sanford D. Sigal, president and CEO of NewMark Merrill, owner and manager of a mall in Woodland Hills, California.
“Very few small owners are ready for this type of market,” said Sigal, who expected to receive approximately 57 percent of his May rental from tenants in around 70 properties in California, Colorado, and Illinois. “I saw more offers in the past week that were worth a look than last year.”
Some borrowers looking for lenders’ relief see mixed results. Legacy Development, which mainly owns shopping centers in the Midwest and Southeast, has not received rent from one of its 432 tenants since early April, said Dan Lowe, managing partner of the Kansas City, Mo. company. Legacy lenders to banks and life insurance companies from Development have shown willingness to work with the company, he said. A loan service provider for commercial mortgage-backed securities was less accommodating.
“I suspect that C.M.B.S. borrowers who could not get relief,” said Lowe.
Mr. Sigal said that he, too, found bank and life insurance lenders to be accommodating. He has stopped lending to the commercial mortgage-backed securities lender because of difficulties in working with service providers during the recent downturn, he added.
Still, no temporary relief or permanent restructuring of credit will save all real estate, especially those who come before the pandemic. Because of virus fears, even retail and entertainment properties that developed long before the crisis are likely to have less traffic for weeks or months after reopening, said Brian Stoffers, global president of debt and structured finance at CBRE real estate service companies.
“It will take a while for the real estate problems to fully manifest themselves,” he said. “This was caused by a health crisis that could have life-changing effects on some properties.”
In fact, how the virus affects consumer and business attitudes towards commercial real estate should be a priority for needy buyers, said Carlos A.G. Vigon, a commercial real estate investor in Los Angeles.
After the recent downturn, investors who have found heavily reduced real estate have benefited from the recovery, said Vigon, who founded PaxCap Investors last year to focus on opportunistic deals. Buyers in this new real estate cycle need to calculate the potential cost of redesigning or upgrading real estate to adapt it to new social and health standards.
“This is not a problem that can only be solved with highly available, low-cost capital,” said Vigon, who has $ 300 million in equity. “This is a different kind of transfer. It is bigger and deeper. “