(Bloomberg) – Investors with a record pile of money to fund distressed commercial real estate are in a difficult position: there is nowhere to spend it.
The massive wave of outages expected after the coronavirus shut down offices, hotels and stores last year has not yet materialized. Now, as the US economy transitions from pandemic lows to a vaccine and stimulus-triggered rebound, the window of opportunity for discount deals is closing before it ever really opens.
This may sound like positive news to most Americans, but for a select group of investors who have expected to make big profits from the misfortunes of others, this is a problem. Affected properties do not come onto the market because the owners have little pressure to sell. Commercial property prices have held up – or even increased – because so much money is doing so little.
“We’re starting to see frustration turn into despair,” said Will Sledge, senior managing director in the capital markets division of Brokerage Jones Lang LaSalle Inc. Investors are “ready to push prices up and their yields down to keep them simple.” insert capital. “
US private equity funds held more than $ 250 billion for commercial real estate loans as of March 23, according to Preqin. That included a record $ 75.8 billion in bad loans, a value that has increased in response to the outbreak of late payments on real estate last year.
The stacks of cash can increase even further. According to a new survey by CBRE Group Inc., nearly 30% of institutional investors are targeting distressed and opportunistic commercial real estate deals this year, almost double the proportion as of early 2020.
“With all that capital out there, there will be a ‘Three Stooges’ effect,” said Jim Costello, senior vice president of real estate data company Real Capital Analytics. “They’re all running through the door at the same time, but no one can get through.”
This year should be a boon for distressed investors as its $ 430 billion commercial real estate debt matures. Arrears on commercial mortgage-backed securities increased in 2020 and hotel late payments rose to 24% in June. Investors brought their game books out of the 2008 financial crisis, when real estate loans traded for pennies in the dollar.
But instead of forcing borrowers to pay or refinance on onerous terms, lenders offered modifications and term extensions – lifelines to wait for recovery. Arrears fell and house prices persisted. According to Real Capital, commercial real estate values rose by an average of 6.8% in the twelve months to February.
Ride the storm
Now, troubled properties are in recovery mode as vaccines free people to travel, swarm around malls and return to offices. Consumer spending is expected to increase 6.1% in 2021.
“This is not where borrowers give up after wearing out their homes during this troubled time,” said Jonathan Pollack, global head of Real Estate Debt Strategies Group at Blackstone Group Inc.
Jones Lang LaSalle valued $ 24 billion of potential debt deals last year, and only about $ 1.4 billion came on the market, according to Sledge. Distressed debt pools have traded 85 cents to 95 cents on the dollar, he said.
Yaakov Zar, chairman of the board of directors of Lev, a matchmaker for commercial real estate borrowers and lenders, received a call from a friend offering 100 cents on the dollar for defaulted loans.
“If you pay par, it’s not desperate,” said Zar. “Even in a situation where everything fell behind, there is still too much dry powder.”
Opportunities will still remain troubled as some home builders struggle to refinance or stop investing in money-losing projects. Some properties, such as Shopping centers, for example, face longer-term consumer shifts that are difficult to overcome. But a post-Covid tsunami is not in sight, said Brian Stoffers, global president for debt at CBRE.
“Those who expected the big hits will be deeply disappointed,” said Stoffers.
The clock is ticking for distressed fund managers. Most closed-end funds have two or three years to retrieve the money they raise or lose the right to run it. Not everyone can wait this long to settle payroll and other expenses.
According to Dan Michaels, executive director of Los Angeles-based private equity real estate firm focused on distressed opportunities in the Southwest, Stockdale Capital Partners has until December 2022 to raise a $ 550 million fund closed last February -Dollars to use. Investors may need to be asked for an extension.
“You’re looking at 1,000 deals,” Michaels said. “Find 100 you like. Working on 10. Close on one. “
With few deals coming out, fund managers are turning to darker spots to take advantage of opportunities. One potential source is banks looking to clean their balance sheets to attract mergers, said Pat Jackson, CEO of Sabal Capital Partners in Irvine, Calif., Which has raised $ 4 billion in real estate loans.
Sabal has been in talks with a regional lender since December to buy a multi-hundred million dollar portfolio of debt while the bank prepares for an acquisition. The challenge is to come up with an offer that the seller likes and leaves Sabal room to profit, Jackson said.
“You are bidding on a deal and it’s’ Congratulations! You won! “Said Jackson.” And then you think: Did I pay too much? “
– With the support of Natalie Wong.
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