In the wake of downturns, the recovery in real estate is often heralded by a wiping out of troubled assets. Opportunistic investors typically look for distressed, over-leveraged, or poorly managed properties. Low-interest debt and the promise of market change – often along with a value-added strategy – are boosting activity and signaling an ongoing industry turnaround.

However, 2021 already looks different. There are already tangible signs of a recovery in the first quarter, especially in the multi-family sector, but many opportunistic investors are wondering where all the struggling assets are. Unlike 2009 or 2010, there don’t seem to be many pockets of distress this time around, with higher absorption rates and a faster recovery from the 2008 crisis. The descent during Covid-19 has been quick – and in many ways separate from the underlying real estate fundamentals – and the rally also appears rapid. Here’s why:

Defined luxation pockets

The 2008 financial crisis was a clear economic crisis that led to dramatically disrupted valuations. Many conventional lenders were over-indebted or had heavily leveraged structures that affected their ability to foreclose. This led to a surge in ticket sales after 2009 with the foreclosures. In addition, liquidity was a major issue that affected not only dislocated properties (i.e. properties whose valuations were no longer in line with the market), but almost all asset classes and all. types of products. The lack of buyers in the market and the sudden drop in consumer demand for real estate put transactions on hold for an extended period.

In 2021, there is a much more focused group of risky assets, which in turn could disappear faster while leading to New York’s recovery. In addition, the practices of conventional lenders have become more conservative over the past decade and, as a result, their exposure is much lower today.

That said, pockets of distress or dislocation exist in the following three areas:

Condominium units or unsold buildings under construction

This is primarily the luxury condominium market and many of these units require deck or mezzanine loans to weather the storm.

Transitional lenders in multi-family rent-stabilized buildings affected by HSTPA

Transition lenders sell tickets or salvage properties to partner with value-added operators to sell them later. Besides Covid, eviction moratoria and HSTPA laws, which impact owners’ ability to raise rents to cover expenses such as repairs and upgrades, have put downward pressure on collections , putting the owners in a difficult position.

Consumer-focused assets such as hospitality and entertainment.

There are a number of ticket sales, foreclosures, and operators who turn over assets to lenders. Some opportunistic debt funds step in and are willing to take the risk. For example, the Watson Hotel, the biggest sale in the first quarter, was traded for around $ 155 million, or $ 260,000 per key. This is a steep drop from the pre-Covid per-key average of $ 465,000 in Manhattan since 2019. At a 44% reduction, it’s a prime example of how Covid has affected the hospitality industry, with the previous owner defaulting on his loan to HSBC.

However, these examples may not represent the wider market at present. Usually, overall growth follows a general trend of selling troubled assets first. Today, recovery and growth are already underway as pockets of distress continue to dissipate. As vaccination rates rise and social distancing restrictions ease, it is expected that condo units will move again, restaurants and entertainment will become more viable, and rent collections in rent stabilized buildings. will return to normal.

International travel will always be a problem for hospitality, as Covid spikes persist in some areas overseas. As a result, hotels are likely to be the last sector to rebound after the pandemic, international restrictions and consumer confidence in the travel industry persisting after the return to other activities. In addition, the long-term future of business travel is unclear, as the widespread adoption of video conferencing can lead to a decrease in air and train travel.

Still, the market doesn’t seem to be waiting for all of these troubled pockets to resolve.

Fundamentals of market rent

The pandemic presented a major struggle for development sites, which experienced significant delays due to non-essential construction stopping for months. Even after the takeover of project sites, labor shortages and supply chain disruptions pushed back delivery dates, demanding new bridge and construction funding for developers and contractors to resist. to the storm. The slow rental speed has added to the cash flow difficulties of owners and developers.

Construction sites are buzzing again, however, and the likelihood of a tipping point coming in September for rental is high as students return to learn in person and families revert to more standardized routines. Vacancies in the residential rental market have evolved significantly since November 2020. Estimates are 50% to 75% more leases signed than the previous year. While rent prices are going down (but maybe not for long), vacancies are also going down. As a result, concessions, which are incentives like free months of rent and fee waivers to attract tenants, are becoming less common as business picks up. Investors have shifted their negative concerns about vacancies to a positive outlook for occupancy rate growth. The underlying assumption is also that rental prices will go up; the only question is how quickly they will increase over the next 36 months.

In the commercial sector, the signs are mixed but generally encouraging. Retail struggled before Covid, due to long-term consumer shifts, and this trend is expected to continue even after the pandemic has ended. The silver lining, however, is that well-located retail assets have started to attract national retailers’ interest as they profit from falling rents.

Overall, there is a pent-up public demand to return to normalcy. People want to go to stores, gyms, and other storefront businesses. In the restaurant business, the easing of restrictions means restaurants and bars are starting to buzz again. While many small bars and restaurants have not survived the recession and social distancing, establishments are starting to see new business owners take over old leases. Additionally, many spaces are leased by ghost kitchens, delivery-only restaurants that reduce overhead and in many cases maximize efficiency by operating multiple restaurant brands at once from the same kitchen and from the same staff.

Offices, meanwhile, are also seeing more and more employees returning as the vaccine rollout continues its successful trend. This trend will only increase as employers begin to demand returns to the office. By September, the number of office occupants is expected to increase. Along with new office signings, the outlook is becoming less bleak. However, the long-term effects of hybrid and working from home are still unclear, as the industry seeks to see what happens when smaller office leases expire over the next several years.

What happens next?

With the growth and recovery preceding a wave of distressed asset sales, there will likely be more drives, fewer ticket sales and foreclosures, and less dislocation in asset values ​​as the growing number of transactions will clarify prices.

During the 2008 crisis, the multi-family asset class, for example, began to experience value growth from 2011, three full years after the onset of the crisis. Most of the troubled assets were liquidated in 2009 and 2010 – and even then with some lingering effects.

This time around, the market won’t have to wait that long. The dollar volume of investment sales transactions in New York in 2009 was $ 6 billion ($ 7.41 billion, adjusted for inflation) compared to $ 18 billion in 2020. This indicates high liquidity by compared to the 2008 crisis with higher certainty levels and more predictable recovery of business asset fundamentals. While the first quarter of 2021 was still slow, this is a lagging indicator.

Contract signing activity for investment sales in New York has increased significantly over the past 60 days, suggesting that transaction volume will most likely increase from 2020. Sales activity in March 2021 was comparable to the average activity in the fourth quarter of 2019 and was in fact the most significant. active month in a year and a half.

Fundamentals, particularly in the residential market, are showing strong signs of recovery. Investors shouldn’t wait to see a critical mass of distressed asset activity as a signal to act. This recovery is happening faster than after the previous downturn and market participants are already trading.


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