RCA on What to Expect in the Upcoming Distress Cycle
As Forrest Gump might have put it, “And just like that, we were in a down cycle.” Real Capital Analytics founder Robert M. White, Jr. notes that this newly-minted cycle was triggered by a sudden shock, in common with the 2008 downturn.
Then, it was the simultaneous collapse of Lehman Brothers and other major financial institutions in mid-September 2008. This time, it’s the COVID-19 pandemic.
“There is a generation of new commercial real estate professionals that have never experienced a down cycle,” he writes in an article posted to the RCA website. “For the rest of us, there is still a lot to learn from the last distress cycle that will inform what the upcoming one will look like.”
In the last cycle, RCA tracked over $462 billion of troubled commercial real estate, about 12.5% of outstanding commercial mortgages at the time. Property prices tumbled 35% nationally, causing equity to be wiped out in many deals. Lenders realized significant losses as well.
“The magnitude of distress was not uniform then, nor will it be this time,” White points out. “The hotel, retail and senior housing sectors will clearly have more trouble resulting from COVID-19.
“Geographically, housing-driven markets suffered most in the last cycle, while this time it is likely to be those dense cities most directly impacted by the pandemic or those dependent on the energy industry,” he adds.
In the prior cycle, distress and work-outs dominated the commercial property markets for over three years and it took six years for property prices to recover. White says the new cycle will unfold in similar ways.
“First there is the Ramp-up stage, where distress inflows exceed outflows and lenders must triage trouble situations and bulk up on work-out capacity,” he writes. “This stage averaged 18-24 months last cycle and was followed by a Work-out period lasting two to three years, or even longer in select markets. The divider between the Ramp-up and Work-out stages is the inflection point where investment trends collectively turn positive again.”
For comments, questions or concerns, please contact Paul Bubny
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