“Pockets of Weakness” Mean Potential for Distress

By Paul Bubny

The money is there for distressed real estate acquisitions, make no mistake about that. Citing data from Preqin, Yardi Matrix reported that 57% of the $38 billion raised by closed-end commercial real estate funds in the second quarter globally was earmarked for opportunistic deals.

Yet, the question in some circles is when the shopping spree will get underway. Or, in the long term, will distressed investors find themselves all dressed up with no place to go?

It’s not a question with easy answers. Looking at the office and multifamily loans in its database, Yardi Matrix found few properties in immediate danger of default. However, the firm says in a special report, “there are pockets of weakness that could eventually produce trouble.”

One such (de)fault line is around recently completed properties with construction/bridge financing due before the end of 2021. “Many properties in their lease-up phase have short-term debt maturities and high vacancy rates, and the pandemic is a hurdle to finding new tenants,” the report says.

Another area of concern is longer-term, for properties with thin margins that could have problems in a long recession with weakening demand. “Some 16.0% of multifamily units in properties with loans maturing in 2024 or later have occupancy rates of 90% or less,” according to the Yardi Matrix report. “For office properties, 23.8% of space in properties with mortgages coming due in 2024 or later have occupancy rates of 75% or less.”

There are also pockets of potential distress in markets with large amounts of stock and high vacancies. The major Texas markets fit this description for multifamily, says Yardi Matrix, while in office it’s a combination of an active supply pipeline and low occupancies in properties that back bridge/construction loans that marks New York City as a potential hot zone.

Beyond those outstanding loans, there are secular shifts in office use underway, A&G Real Estate Partners’ Doug Greenspan said on a recent webinar sponsored by the Turnaround Management Association. “One scenario is that many people will go into the office for just a couple of days a week. Even if that’s just 10% or 15% of workers, you’re talking about far-reaching effects on the demand for space and, in turn, the value of office assets.”

As for the retail sector, Greenspan said, “Underlying issues that were visible in retail pre-COVID really came to a head with the onset of the pandemic… Our own Chapter 11 client list now includes, among others, GNC, Pier 1, Ascena Retail Group, Tailored Brands, Tuesday Morning, Modell’s, Stage Stores and Nieman Marcus.”

However, Greenspan pointed out that some retail operators will emerge stronger than before. The accelerating shift to e-commerce is now spurring some retailers to speed up the implementation of what were formerly medium- or long-term plans to ramp up their e-commerce platforms, he said. “Those that are able to do so successfully are already reaping the dividends.”

As Greenspan’s recent discussions with restructuring attorneys have made clear, various funds are preparing to make distress acquisitions, not only in retail and office but also in hospitality. “As this drags on, they are ready,” he said.

For comments, questions or concerns, please contact Paul Bubny