The world may remember 2020 as the year “normal life” was torn up by the coronavirus pandemic.
But for many U.S. commercial real estate owners the big trouble hasn’t even started yet.
“I think it’s going to be a two-headed monster,” said Pat Jackson, chief executive officer and founder of Sabal Capital Partners in Irvine, Calif., of the outlook for struggling commercial buildings.
“Some assets are going to recover and do well. Obviously, we’re very bullish on multifamily over the long-term,” said Jackson, a lender and investor in billions worth of battered assets in the last recession. “On the flip side, there’s a lot of distress and it’s coming.”
Jackson sees properties that have run “out of runway,” after almost a year of business disruptions. And while the government races to distribute vaccines, lockdowns in the U.S. have ramped back up in the colder months as COVID-19 cases, hospitalizations and deaths soared.
The resurgence of the coronavirus has stoked fears that a V-shaped economic recovery could be out of reach, while also spurring concern that banking regulators, worried about potentially spiraling risks to the financial system, might crack down on banks and others exposed to souring real estate.
“The second surge of COVID hasn’t helped anyone,” said Lisa Pendergast, executive director at the CRE Finance Council, a commercial real estate finance trade group.
Pendergast pointed to the 10.2% of loans out of the near $600 billion commercial mortgage-backed securities (CMBS) market that in November were in “special servicing,” a category that is often the first stop for borrowers looking for temporary or permanent debt relief.
That’s below the 12.6% peak in the wake of the 2008 global financial crisis, which took about two years to reach. But the volume of problem loans easily could grow as the pandemic wears on and more borrowers come to grips with its fallout, including how the use of commercial buildings ends up changing.
In a sign of the times, New York City’s reeling commercial real-estate industry recently put forth a proposal to turn some 1 million square feet of Manhattan office space into housing, the New York Times reported, an effort to avert a potential collapse in property prices.
Big property owners also have become a key focal point, because unlike real-estate loans held by banks and insurance companies, the CMBS market makes it fairly easy for borrowers on Wall Street to walk away from properties when trouble hits.
“You can just hand back the keys,” Pendergast said of most CMBS financing.
A road map for distress
For decades, the CMBS market has been a key corner of finance where loans on hotels, offices, industrial centers and other commercial properties are packaged into bond deals and sold to investors, including pension and bond funds.
While it isn’t the largest source of commercial real estate finance, CMBS appeals to borrowers looking for debt on a non-recourse basis, meaning if a property fails or ends up underwater, a lender can’t go after the operator’s other assets to recoup losses.
“Keep in mind,” Pendergast said, “A lot of borrowers, if they secured an asset five, six or seven years ago, they probably made a good return on their equity and made a profit.” Some will say, “Take my asset.”
source: marketwatch.com
