While there has been much talk of distress in the wake of the covid-19 crisis, many opportunities have yet to emerge, according to multiple real estate managers.
Troubled assets have so far been concentrated in the real estate debt space. “Where we’re seeing the distress first is really on the debt side,” Robin Potts, co-head of real estate investments at Canyon Partners Real Estate, the Los Angeles-based investment firm, told a webcast organized by conference producer IMN late last month.
Potts said she had seen a “flood” of loan sales from leveraged debt funds – primarily mortgage REITs – come to the market over the last seven weeks, totaling around $2.5 billion from 30 different lenders.
She added: “Lenders here are looking to generate liquidity to either solve unpaid issues in their overall balance sheet or in anticipation of a loan essentially becoming non-performing if it’s secured by a hotel for example.”
Looking ahead, Potts said her firm is ready to deploy capital in this environment but with strong sponsors in situations that “make sense.”
“We’re being selective,” Potts said. “For a rescue capital situation, that could mean a senior bridged loan or a mezzanine or preferred equity piece to help plug the gap and help people get through this period of time. Or it could mean restructuring on the equity side.”
But while distressed real estate opportunities are emerging on the debt side, most attractive deals on the equity side are still a long way off, according to Doug Faron, vice-president on the investments team at Los Angeles-based private equity real estate firm CIM Group.
“We’re starting to see a lot on the debt side in the market today, with loan books coming up for sale as margin calls happen,” said Faron. “But I still think it will be a while until equity opportunities arise, as there’s still a pretty large bid-ask spread between what sellers are looking for and what buyers want.
The ability to narrow that bid-ask spread will depend on the balance sheet, whether the seller is a lender or an owner, and what type of liquidity needs they have that will either force them to transact or to remain on the sidelines, Faron said.
For example, some hotel REITs have been quickly shopping some deals to get liquidity, but the wide bid-ask spreads have resulted in a large chunk of these transactions falling through, according to Dan Rosenbloom, managing director of investments at online real estate investment platform Cadre.
While Rosenbloom said he would not touch retail in the near future, he foresees distressed opportunities in the hotel sector in the coming months. “These opportunities are still three to six months away until you start to see forced selling,” he said, attributing the delay to recent negotiations around forbearance.
However, with cash-rich investors ready and waiting to deploy stacks of dry powder into distressed real estate assets, such as competition may mean that buyers will not be able to acquire assets at the deep discounts they were expecting.
“There is so much money out there chasing hotels and retail deals, said Faron. “As more and more people look for amazing discounts, I wonder when this will materialize.”
While “true acquisition” deals are pretty much on hold, some properties have traded in the multifamily sector at pricing that is at most 7-8 percent below pre-covid levels. However, some investors are not ready to acquire discounted assets until the real estate market is more stabilized.
“I obviously want to buy them as cheap as possible,” said Rosenbloom. “But I would rather miss a couple of percentage points and pay a little bit more to come into a more stable world instead of stepping into quicksand.”
Meanwhile, Gary Jaye, head of commercial acquisitions for the Americas at CBRE Global Investors, said: “Generally, IRR-wise, I would expect that you should be earning a little bit more risk premium today than you were three months ago, but that will all be dependent on the buyer and seller.”
He advised operators to take advantage of the impending end to the “friendly environment” for borrowers.
“This ‘we’re all in this together’ period is coming to an end,” Jaye said. “All this glue holding everything together, such as anti-eviction measures and forbearance from lenders, will collapse. There could be opportunities and we’re willing to shoulder that risk if we could get better pricing.”