I recently attended the IMN Distressed CRE Forum in New York, alongside my colleagues Brian Cohen, Zev Gewurz and Doug Rosner. It was great to connect with and hear from people across many different places in the industry, including Brian, who moderated the panel, “Underwriting & Financing Distressed Property Acquisitions.” It was also striking to note how similarly everyone views the current challenges and opportunities around distressed commercial real estate.
While there were many insights to be gleaned during the event, I found the following key takeaways particularly relevant and reflective of the current market:
- There is a broad consensus that owners of distressed real estate are trying to buy time to turn around their properties or their capital stack.
- Unless the property has no hope of recovery, lenders are not forcing their borrower’s hands.
- Interest in investing in or taking over performing assets with broken capital stacks, particularly multifamily is vast. However, these opportunities have been few and far between because lenders are not forcing the issue with borrowers.
- Large volumes of commercial real estate loans are coming due in the short and medium term, and lenders are eventually going to need to clean up their books.
- When a distressed real estate opportunity does arise, in addition to understanding the physical and financial performance of the asset, investors must also understand the loan and ownership structures and the potential tax issues of their investment, both to protect themselves and create a compelling offer for the current owner.
In summary, many distressed property owners are delaying action, and lenders aren’t forcing them unless recovery is unlikely, therefore limiting investor opportunities. With many real estate loans coming due soon, lenders will need to act. Investors must understand the property’s condition, loan terms, ownership, and tax implications to protect their investment and make competitive offers when opportunities arise.
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