As of April 2021, there remained relatively few distressed commercial-property sales, despite the ongoing COVID-19 pandemic and severe shocks to certain segments of commercial real estate. The number of distressed sales are, however, expected to rise. Manus Clancy, Trepp’s senior managing director, spoke with Scotsman Guide about the state of distress in the market and how these issues may be worked out over the course of this year.
How much distress is in the market right now?
We’re talking about $50 billion to $60 billion in loans that are with a special servicer or interacting with special servicing. That’s about 10% of the market, give or take.
Does this pretty much exclusively involve retail and hotels?
Hotels are the biggest part of that. The entire industry has been extraordinarily hard hit. On the retail side, it’s not as universal. In hotels, everything got destroyed. In retail, there were pockets of strength. [Assets that are] grocery-anchored, Home Depot-anchored, Lowe’s-anchored, Target, things like that, held up very well. It was really the malls that have dominated the distress there.
Do you expect more distressed sales?
In the hotel space, we did see a lot coming up [early this past April] through Ten-X, through their auction site. They had about 20 hotels out for offer for an auction, which was an extraordinarily high number. That could be the dam breaking for the beginning of a selling season.
The same is true of the malls. As we come out of this crisis, and people get to herd immunity and big vaccination numbers, special servicers will want to resolve everything. You will see the wheat separated from the chaff. Those [properties] expected to recover will recover. And those where the damage has been too great will go through the foreclosure process and be sold off. The moment of reckoning is coming.
Do owners have enough financing options to allow them to work through problems?
Well, there’s incredible liquidity out there for people circling [and] looking for distressed opportunities. There’s so much money waiting for these guys to stumble. In that regard, there’s plenty of capital there for the owners willing to partner with somebody.
In the hotel space, we’re so close to the finish line, and a lot of these hotels are finding money. They just need another three months, whether that is a few more months of forbearance from the special servicer or going to a partner. If [you own] a small hotel, you’re tapping friends and family, or something like that. They see the light at the end of the tunnel and are finding ways to muddle through.
Is the distress focused in the central business districts of gateway markets?
In the hotel space, the hardest-hit scenarios have definitely been the gateway cities. The most distress and the worst outcomes now are in New York City and Chicago. In those two cities, it is largely because of a complete drying up of business travel and overbuilding ahead of COVID-19.
There was already a glut of hotels in New York. Houston is a disaster because of the combination of COVID and a weak energy market for the last five years. In Portland (Oregon), it’s probably because a lot of the big hotels are in the area where there has been a lot of protest. So, that keeps people away in addition to COVID. The distress in the retail space is mall-oriented. It’s really anywhere where there’s a B or C class mall that’s dated and has a dwindling tenant base.
Do you have any final thoughts?
Well, the real issue right now — and where there’s a real debate going on — is what the new normal looks like in office space. Nobody really knows what’s going to come out of this. [JPMorgan Chase CEO] Jamie Dimon said [in April] that if we have a hundred employees somewhere, we’re going to operate our real estate with 60 desks. So, everybody wants to get their arms around whether we’re coming back in full.
And as it is right now, you see enormous amounts of sublet space in gateway cities. So, how does office come out of this? What does demand look like in 2022 and 2023? Is this a bump in the road — as some people would think — or the next crisis awaiting us? ●