Distressed Real Estate Today and What It Means for CRE
November 23, 2020
Whether in a commercial or residential setting, property distress occurs when an owner can no longer support the mortgage payments, rent payments or structure of an asset. Most often, the end result is foreclosure, where lenders repossess the property, and resell it as distressed real estate. With the current state of the world we live in – battling a global pandemic – it’s no wonder distressed real estate is on the rise.
According to data firm Trepp LLC, 278 properties backing securitized mortgages were in foreclosure as of October 1, 2020, throughout the United States. At least 80 of them had financial problems related to COVID-19. Across the board, both commercial and residential real estate attorneys and executives say they continue to expect the number of foreclosures to increase.
In anticipation of a growing need for help with this, Valbridge has announced a non-binding, non-exclusive collaboration with NAI Global, a global commercial real estate brokerage firm that completes more than $20 billion in commercial real estate transactions yearly, many of which have been distressed property sales. Our team will collaborate and work in tandem as mutual referral sources for clients in the pursuit of distressed real estate asset sales and dispositions.
The Valbridge Property Advisors’ team will focus on our core business of commercial property valuations, a critical first step in distressed property transactions, while NAI Global will concentrate on dispositions, management and marketing properties for lease or for sale.
The Issue at Large
Within the commercial sector, many property owners' have been struggling to collect rent from existing tenants and attract new persons or businesses to vacant spaces within their buildings. Over time and without normal rental income, many property owners have lost the ability to collect enough money to make mortgage payments and cover operational expenses. It's the catalyst for when lenders then take control of their properties (foreclosing it), hire special servicing companies and sell assets under duress.
Most lenders were initially happy to grant debt forbearance at the onset of the pandemic. We believe it's safe to say -- across all industries -- no one knew the pandemic would reach the magnitude that it has. But as forbearance periods are now reaching their expiration dates, more lenders are going after properties or demanding additional capital in exchange for extending relief.
According to NAI Global, the situation is most dire for hotels and resorts, retail properties and retail-weighted mixed-use properties, though office properties are likely to be negatively affected in this cycle and part of the wave. Even now, countless businesses have yet to re-occupy their buildings and those that have are nowhere near maximum capacity.
“It's just a question of how bad is it going to be,” says NAI Global President & CEO Jay Olshonsky, FRICS, SIOR, CCIM. He expects commercial real estate foreclosures to be far worse than what happened during and after the 2007-2009 recession, when properties backing tens of billions of dollars in commercial mortgages were foreclosed.
According to a report by the Wall Street Journal, CWCapital, a servicer that oversees securitized mortgages whose borrowers are late on payments or otherwise in trouble, has already begun asking borrowers to put up more money. If they won't or are otherwise unable to, the servicer might end up taking over the property or selling the mortgage to an investor. The report says that CWCapital's president estimates that his company could end up taking over up to 30 percent of the properties where it initially granted debt relief to.
Still, foreclosure is an exception. Banks have been more willing to extend forbearance periods when necessary. Many nonbank lenders, such as private-equity funds and commercial mortgage-backed securities lenders, are more eager to foreclose. But the longer the crisis lasts, the more likely a surge in distressed real estate.
The Valbridge Role
Our team of independent appraisers specializes in evaluating all types of property and land – from multifamily housing units and communities to medical facilities, commercial offices, industrial spaces and beyond. Our expertise allows us to accurately survey, valuate, appraise and produce custom, consistent appraisal reports across the U.S. market dependent on the current economic climate and up-to-date data.
“Valuation is typically the first step every commercial transaction process. Our ability to provide national coverage with local expertise, makes our suite of services the perfect complement to NAI as more of these properties start to flood the market,” said Karl Finkelstein, VP of Marketing and Business Development for Valbridge Property Advisors. "With the current state of the word and such unprecedented times, our team remains dedicated to valuating commercial properties that have recently been vacated, foreclosed, or are otherwise empty, ready and waiting for new owners. We perceive that our services will complement the work being done by NAI Global and will further help to get new and credible tenants into spaces that have been sitting vacant and continue to do so as the pandemic persists," said Finkelstein.
Afterall, the return of the nation’s economy depends on successful commercial businesses and their ability to run successfully. It’s also no secret that more people are living in multi-family residences. From traditional urban core developments to suburban student housing and rural tax credit deals, there are a multitude of dwelling solutions and types of financing in the marketplace. Valbridge has seen them all and is able to provide up-to-date property valuations so that vacant dwellings and business can get, well, back to business.
What does it mean when a commercial property can no longer function? There's a trickle effect. For one, the owners and employees of the business that inhabited that property are left without work and possibly without income. Then, all of the businesses that supported those property's employees -- local food and beverage spots, drugstores, dry cleaners, etc. -- struggle. When anchor stores in malls go away, so does the foot traffic, hurting all the other stores in the area. The demise of hotels, made worse by the elimination of business and leisure travel, makes it that much harder to sustain tourism. All of these distressed properties have a ripple effect on the businesses that are intertwined with and/or exist in close proximity to them.
Recovery of the Market
Our hope is that by channeling the strengths and skills of our team of experts, we will be able to assist in getting vacant properties across the nation fairly valuated and back on the market. In turn, this should enable essential businesses to slowly be able to inhabit and operate from these properties.
While we at Valbridge continue to focus on our core business of commercial property valuations, we will complement and support the work being done by NAI Global, who is concentrating on property dispositions, management and the marketing of fairly valuated properties for future lease and sale.
Our hope is that we are able to aid in the recovery of commercial real estate and business throughout the U.S. so that we are all able to see the light at the end of the tunnel when we eventually recover fully from the coronavirus pandemic.