The commercial real estate market is driven by multiple dynamics. This week, there have been many market experts offering a generally, positive long-term outlook on the commercial real estate market. Many believe that a strong recovering economy will compensate for companies like JP Morgan Chase that are trimming down their office footprint in Midtown Manhattan due to an embrace of remote work. Even though the overall office sector is expecting a marked decline in demand across submarkets, it's important to remember that over the next two to three years, that will be mitigated by the creation of new jobs that the U.S. economy and the global economy will produce.

Surely, the pandemic will continue to impact the commercial real estate market throughout 2021 and into 2022. However, while some companies are reducing their office footprint as they adopt more flexible working policies, there are those such as Facebook and Google that have signed new and leases for additional space in the City. 

We hope that many of you will register for the upcoming webinar with leading economist, Dr. Mark Doutzour next Tuesday, May 11^th at 8:30am-10:30am EST. Lastly, we hope that you check out and avail yourselves to the recorded event hosted by RealtyZapp, the emerging and affordable CRM platform for real estate professionals. Recently, RealtyZapp and the Chapter formed a strategic alliance offering this cutting-edge service to all your members. This includes a link to our Chapter’s homepage. Stay strong and remain positive!   

Best,

-J.R.

(646) 481-3801

A full year of pandemic altered work is now transforming part of Palm Beach County's economy. More than one very successful business owner from the financial world escaped Covid-19 related restrictions by coming to Palm Beach County. And they're not going back.

Doug Cifu, CEO of Virtu Financial, says the pandemic has made it very clear his equities market firm can operate from anywhere. He told WPBF 25, "I see no reason why a hedge fund or private equity firm should stay in New York. It just makes no sense to me whatsoever."

He's moving operations into the new Divosta Towers in Palm Beach Gardens. Virtu has several national and international offices and one thousand employees, and many of the key players are heading here to South Florida. Recruiting his people to move is easy, says Cifu. "The quality of life in South Florida and the ease of doing business there, on top of giving all of our employees an eleven, twelve, thirteen percent pay increase because they're not going to be paying New York State and New York City taxes."

Ten Wall Street and financial sector firms have recently pulled the trigger on a move to Palm Beach County. Business Development Board President and CEO Kelly Smallridge says, "It has been the most economic activity we have seen at the Business Development Board in three decades from one industry." She also says while the average salary in the county is $55,000, the average salary at the firms coming here is $100,000 to $150,000.

New Day USA, a mortgage company serving military veterans, is expanding from the company's Maryland headquarters to the brand new '360 Rosemary' building in downtown West Palm Beach , taking the top two floors as home for a projected 600 employees over the next 5 years. Founder and CEO Robert Posner says, "Florida right now has the talent, the university infrastructure, and the trained work force that is really gonna propel the growth of our company."

Both Posner and Virtu's Doug Cifu own homes here in Palm Beach County and express enthusiasm about the South Florida way of life and the future of doing business here. The development board's Kelly Smallridge says up to three more similar financial companies are considering relocating to the Palm Beach area.

"These executives and mid level managers have the ability to spend money in our restaurants. they go the dry cleaner, they hire house cleaning crews, construction crews, accountants, attorneys. They're here long term."

Source: ABC News/Local 25 Affiliate

KEY POINTS

·        New York City will fully reopen starting July 1, Mayor Bill de Blasio announced.

·        The city as of Wednesday had administered more than 6 million doses of Covid vaccines, with roughly 36% of the city’s adult population fully vaccinated, according to city data.

·        “We are ready for stores to open, for businesses to open, offices, theaters, full strength,” the mayor said.

·        New York City will fully reopen starting July 1, Mayor Bill de Blasio said Thursday.

“We are ready for stores to open, for businesses to open, offices, theaters, full strength,” de Blasio said in announcing the date on MSNBC’s “Morning Joe.”

It’s the first time the city will be fully reopen in more than a year. The first shutdown began March 2020 when the city became the U.S. epicenter in the early days of the Covid-19 pandemic.

However, New York Gov. Andrew Cuomo said he would like to see the city reopen before the date pitched by de Blasio. “I don’t want to wait that long. I think if we do what we have to do we can reopen earlier,” Cuomo said, according to NBC New York.

Restaurants, gyms, shops, hair salons and arenas will open at full capacity. Smaller theaters could reopen over the summer and Broadway is on track for opening by September. Schools will be back at “full strength” in the fall.

New York City has recorded 923,953 coronavirus cases and 32,461 virus-related deaths as of Wednesday.

Also of Wednesday, more than 6 million doses of Covid vaccines have been administered in the city, and about 36% of its adult population is fully vaccinated, according to city data. More than half the city’s adult population has received at least one dose.

“What we’re seeing is that people have gotten vaccinated at extraordinary numbers,” de Blasio said. “This is going to be the summer of New York City. I think people are going to flock to New York City because they want to live again.”

It wasn’t immediately clear whether mask mandates will stay in place through the summer.

On Wednesday, Gov. Andrew Cuomo announced that the state will lift dining curfews statewide and a ban on bar seating in the city starting in May. Seating at bars will be allowed in New York City starting May 3, while outdoor dining curfews of midnight are set to end by May 17. Indoor dining curfews will expire May 31.

Source: CNBC

Office demand in major U.S. markets jumped by 28% from February to March, according to a monthly report by VTS, a software provider for commercial real estate landlords. VTS’ Office Demand Index increased by 160% in the first quarter and now sits at 86, 9% less than where the index was in February 2020, leading the report to conclude that “return to work appears imminent.”

VTS’ index is largely based on the number of office tours conducted by potential tenants in a given market, and its reported increase in demand has not translated into a boost in leasing activity quite yet, according to research from Colliers.

“[Q1 was] just a continuation of what we had experienced the past few quarters,” Colliers National Director of Research Steig Seaward told Bisnow. “Tenants are slow to return to the office. Nothing has really changed.”

The same is true of in-person work — employee occupancy rates have only inched up over the first four months of the year, according to card swipe data from Kastle Systems. Office usage across the 10 largest markets in the U.S. averaged 26% in the week ending April 21, only a couple of percentage points higher than the rate in mid-January.

Rubenstein Partners has experienced a notable increase in tours of its offices, especially in the suburbs, Rubenstein Partners Sun Belt Regional Director and Director of Equity Capital Markets Read Mortimer said, adding that leases are “just starting to get signed.” A decent chunk of the touring and leasing activity so far has been from companies that were already seeking space in the months leading up to the pandemic resuming that search.

“Covid happened, and everybody said, ‘Whoa, we've got to figure this out,’" Mortimer said. “And some of those same requirements have started to poke back up.”

His words echoed those of VTS CEO Nick Romito, who on Bisnow’s Make Yourself At Home podcast on Friday attributed the boost in tours to “pent-up demand.” The increase in tours hints that companies have a level of certainty that offices will return to relevance at some point soon.

With the vaccine now widely available, the national infection rate in decline and the economy having turned a corner, it stands to reason that companies see more stability to make long-term planning easier than it has been since the world was thrown into disarray. But there is still no certainty over when a sufficient portion of the population will be inoculated for social distancing measures to be removed, and no one knows how workers will react once directed to return en masse.

“I think the goal posts on that mindset have shifted,” Seaward said. “Earlier in the pandemic, people were saying, ‘When we’re all vaccinated, we’ll feel better about it.’ But now, only half the country has taken a leap and gotten vaccinated, and the other half hasn’t. … Until people truly feel comfortable returning to the office, they’re not going to. And I don’t know how much longer that’s going to take.”

But many in the industry think the picture is becoming clearer: With a summer that promises to be chock full of vacations just around the corner, Labor Day has the look of a popular signpost.

“Across our portfolio, whether it’s corporate tenants, law firms or investment banks, Labor Day seems like the outside date for returning,” Mortimer said. “A lot has coalesced around the push for returning.”

With the third and fourth quarters traditionally being busier in terms of office leasing, a Labor Day return will likely correspond with the first big wave of leasing activity since 2019, Seaward and Mortimer agreed.

“[A post-Labor Day bump] makes total sense to me, and I would expect it," Mortimer said. "For now, some people have high degrees of conviction that they need firms back in the office, and those people are acting now. But there’s another group of people who really want to wait until they’re absolutely certain. So I would suspect we’ll see another wave of demand injection before the end of the year.”

The return of workers will likely have to precede a true recovery in office leasing, as many companies will use their first weeks back to test drive whatever hybrid work schedules or revamped office layouts they put in place before they commit to a new lease.

“Because we’re not back in it and all the conversations are more theoretical, everyone is going to have to see if [their plans] are going to work,” Seaward said. “I think it’ll depend company to company and sector to sector, but I do think it’ll take a little more time once we get back into the office to assess what works and what doesn’t work. Do we need more collaboration or conference rooms or less, for example.”

Another factor in the increase in tours is that this year will essentially represent two years’ worth of lease expirations, considering how many short-term extensions were signed last year when so little was known about how the pandemic would play out.

“[Short-term extensions] were a deferral of demand and not a loss of demand, so you are going to have some pent-up demand that could help boost market activity over the next 12 to 24 months,” Mortimer said, noting that many extensions were for two to three years rather than just one.

Though Romito is one of many who believe that new hygiene standards will reverse the years-long trend of increasing employee density, the ubiquity of remote work still portends a reduction in office space that several large companies have already announced. As some companies relocate and leave behind larger blocks of space than new companies are willing to fill, vacancy will likely increase even as leasing activity picks up, Seaward said.

“I anticipate that vacancy rates will continue to climb probably until mid-to-late 2022," Seaward said.

Source: Bisnow

U.K. hotels are gearing up for more visitors after a terrible 2020. A number of luxury or boutique U.S. hotel operators are ready to check in.

The Mondrian, the NoMad and the Graduate are among the brands that are planning to open new U.K. properties over the summer. They are betting that a mix of cultural tourists from abroad and stir-crazy locals eager to travel again will fill their rooms.

“Luxury travel will always gravitate towards London,” said Chadi Farhat, chief operating officer of the Los Angeles-headquartered SBE Entertainment Group. “London remains buoyant and a global capital of art, culture, architecture, food and drink, and commerce.”

His group is poised to open the 120-room Mondrian Hotel in the east London neighborhood of Shoreditch this summer, with suites costing as much as £1,099 a night, equivalent to $1,500.

Graduate Hotels, the Chicago-based operator of 30 lodging properties in U.S. college towns, said it would soon open its first European outposts in the England university cities of Oxford and Cambridge. Chief Executive Ben Weprin believes that Britons prevented from traveling overseas this summer will opt to staycation instead.

U.K. hotels faced a tougher 2020 than those in the U.S. Hoteliers in Britain endured months of government-mandated full or partial closures.

Lodging data company STR said that British occupancy levels last year ran at 40.4%. That was slightly worse than the 44.1% in the U.S., though a bit better than in Germany, where occupancy fell to just 31.9%. British hotel revenue per available room last year fell harder, too, down about 60% compared with 2019. U.S. hotel revenue fell 47% over that period.

London’s more moderately priced hotels ran small losses in 2020. Many remained in limited use by health and other essential workers, or were pressed into service as quarantine hotels. But the pandemic caused most business travel to dry up and pounded the high-end properties. London’s luxury hotels suffered losses of £35 a room on average per night, according to real-estate agent Knight Frank.

Will Duffey, head of Europe, the Middle East, and Africa hotels and hospitality at JLL, said regional hotels catering to domestic tourists will be the quickest to return to profit. Business hotels and London’s luxury sector, dependent on North American and Middle Eastern travel, will take longer, he added.

But Julian Kemp, a senior director of CBRE, is hopeful the U.K.’s rapid vaccination program could help its tourist trade bounce back before other nations. “The question is, will some of our air corridors open in advance of some European ones,” he said.

He doesn’t believe, however, that international travel will return to a semblance of normality until 2022. When it does, he thinks business travelers are the ones to watch.

Mr. Kemp also has faith in luxury. “All the statistics out there…[show] how much people have saved over the last 12 months,” he said. “They will want to go and have that experience.”

One beneficiary of that trend could be the Sydell Group LLC. The New York-based hotel operator plans to open the 91-bedroom NoMad Hotel in Covent Garden, with room prices ranging from £455 to £2,495.

Source: Wall Street Journal

Property distress is easing with pandemic recovery in sight. Dash for deals and record dry powder help lift property price.

Commercial real estate finance leaders are optimistic one year after the COVID-19 pandemic brought deal activity to a virtual standstill.

That’s according to panelists at Commercial Observer’s fifth annual Spring Financing CRE Forum in New York, who said on April 22 that while challenges remain, conditions are ripe for recovery across a number of real estate asset classes amid strong economic growth and record-low interest rates.

“Competition for loans, really, across all asset classes is robust,” Dustin Stolly, co-head of capital markets debt and structured finance at Newmark, said during the first panel, “A Fresh Outlook: A New Year, A New Economic Forecast From Top Market Participants.”

“We aren’t quite back to pre-pandemic levels, but interest rates are really low and borrowers are taking advantage of it,” he added.

Stolly noted that spreads across hospitality assets have compressed around 20 basis points during the last month, and there is also capital demand for other sectors hit hard during the pandemic. These include office buildings hosting large corporations with strong lease terms. He added that multifamily, industrial and life sciences are soaring with strong prospects for heavy lending activity in the near future.

Brian Ward, CEO of Trimont Real Estate Advisors, said his pessimism about a commercial real estate recovery has recently turned to optimism. He cautioned that recoveries of certain sectors, like lodging and retail, will hinge largely on forbearance agreements, though.

The first panel — which Mark Edelstein, chair of Morrison & Foerster’s global real estate group, moderated — also featured Warren de Haan, managing partner at ACORE Capital; Brett Mufson, president of Fontainebleau Development; and Barbara Denham, senior economist at Oxford Economics.

Denham said New York City, like the U.S. in general, is projected to recover jobs lost during the pandemic She said that much of this growth will be driven by temporarily lost health care and social services positions, and the growth of technology companies. She noted that while hotel and restaurant jobs will also recover over the next year and a half, the tourism industry is expected to take three to four years before recovering.

New York City lost about 2 percent of its financial services jobs in 2020, but Denham said it should be able to narrow some of that gap from the technology sector’s growing presence in the market. She said life sciences growth would also be a key factor in New York’s recovery.

“We have been tested here,” Denham said of past challenges New York City has faced, such as the 9/11 terrorist attacks and the Wall Street crisis of 2008. “We have shown our mettle and think it gives us a lot of people confidence that New York City, especially, can recover from this recession because we have done so strongly in the past.”

As many CRE loans faced challenges during the past year, lenders learned how to better nurture relationships with borrowers that are helping them gain more access to the market now as the economy opens up more. Borrowers faced headwinds caused by construction delays during government shutdowns at the beginning of the pandemic and, in some cases, required loan modifications to navigate through the health crisis.

“At the end of the day, for us, it’s all about repeat borrowers and really being a good counterparty working with borrowers, giving latitude, giving time when you need to,” Josh Zegen, co-founder and managing director of Madison Realty Capital, said during the second panel, “Relationship Status: How COVID Is Shifting Lender & Borrower Dynamics & What that Adjustment Looks Like in a New Era.”

Zegen noted that the lenders who were best able to proactively assist borrower clients during the pandemic have been ones who were not over-leveraged and had sufficient flexibility to provide latitude when needed. He added that his team also took initiative with many “problem-solving” strategies with borrowers who encountered barriers with lenders. 

Joel Traut, managing director of Kohlberg Kravis Roberts, said the credit market’s embrace of short-term forbearances was the right strategy in hindsight, given the massive economic toll and uncertainties surrounding how the crisis would affect valuations long term. Traut said forbearance requests are way down one year later in his firm’s portfolio, but cautioned they are still prevalent for such sectors as lodging, retail and Class B office.

“You have to have a balanced resolution with your borrowers in the instance where they are contributing something and the lender is contributing something to get to the other side,” Traut said. “You are going to continue to see these discussions occur, but I think at this stage now, we are starting to think more about what are the long-term implications of this on value and what is the right construct for negotiating solutions for our borrowers.”

The second panel — which Megan Vallerie, a partner in Seyfarth Shaw LLP’s New York office, moderated — also included Matthew Rosenfeld, head of U.S. debt at Cain International; Kevin Cullinan, managing director and co-head of credit strategies and head of investments at Mack Real Estate Credit Strategies (MRECS); and Drew Anderman, senior managing director at Meridian Capital Group.

Cullinan said the past year was an eye-opener on the importance of communicating with clients about preparing for a variety of unknown scenarios when closing transactions and helping them navigate the process. This year, MRECS is connecting prospective borrowers with existing clients to share their story about the strong business relationships that have been formed amid the clouds of COVID.

With many borrowers seeking more shorter-term or floating-rate offerings, traditional real estate lenders are facing more competition from insurance companies for investment strategies. While banks have been more selective as of late with lending, panelists expect them to soon be back to their normal capital levels with the economy opening up as more people get vaccinated.

Following the second panel, Sam Yen, head of commercial real estate digital at JPMorgan Chase, spoke about the role technology is playing in today’s CRE financing landscape, as part of a fireside chat hosted by Richard Sarkis, founder and executive chair of Reonomy.

The surge in vaccinations in the U.S. “put a defined timeline on when things would get back to normal, and it eliminated a lot of uncertainty,” said Starwood Property Trust Chief Originations Officer Dennis Schuh, who added that it’s evidenced in how well the equity markets have rebounded.

Heaps of capital that developed, even before the pandemic, have been on the sidelines raring to go, but while “everyone wants to bottom feed and buy at discount when a crisis hits,” Schuh said, “oftentimes the best strategy is time.”

Schuh spoke as part of the third panel, a five-person discussion titled, “Unleashing Pent-Up Activity: Does The Vaccine Hold The Key to Driving New Deals?” It was moderated by Cathy Cunningham, Commercial Observer’s co-deputy and finance editor, moderated.

Schuh was joined on the panel by Christopher Niederpruem, group head of real estate finance at CIT Group; Sonya Rocvil, principal and founder of Bedrock Real Estate Investors; Mike Sroka, CEO and co-founder of Dealpath; and Shaunak Tanna, head of structured investments at Basis Investment Group.

With the number of fully vaccinated people in the U.S. growing steadily, Niederpruem, who was speaking on the panel from a hotel room on the West Coast, said he’s seen overall deal activity increase in kind to start the year. 

While asset classes like industrial and multifamily have remained strong through COVID-19, retail has now “turned the corner, in most cases, with collections,” Tanna said, adding that with leisure travel now driving a rebound in hospitality demand in many destination locations, it’s provided equity investors with the confidence needed to get back in the game, while having a similar effect on buyers of debt paper.

“We’re seeing quick changes in the behavior of people, and visibility into those behaviors and the related impact on the predictability of cash flows, causing an increase in transaction [volume],” Sroka said. “Underwriting has been tricky, but prices are being established.” 

While the “water is warm right now,” according to Schuh, lender and investor appetite has certainly narrowed, Niederpruem said, highlighting the shift away from retail and into industrial, distribution and multifamily. Despite the relative risk-averse approach, the CIT executive said that bank lenders are starting to see repayment levels climb.

The discounts exist in the hotel and retail spaces, Tanna said, but his Basis Investment Group, which invests in mezzanine debt and preferred equity, is being “judicious about the amount of capital we dedicate to those areas.”

Still, Tanna said he traveled to Orlando for spring break with his family and did not expect what he experienced. Hotels were booked up, and his flights to and from the city were essentially full.

“I was surprised how robust the activity was,” he said.

“If you go to Florida now, [you might be] paying more than you did in 2019, and the hotels are full,” Schuh said. “The convention [center] business is being filled with leisure,” he added, but that area of hospitality will be the “last to come back,” although he said he has a colleague in Miami who was recently at the Loews Miami Beach Hotel, and saw group business there and attendees wearing name tags, which he said is a “good sign” of what’s to come.

And while there are shreds of positive movement on the leisure and business travel hospitality front, the book is still out on what the future holds for offices, especially in urban cores.

“The office landscape will be changed, whether that’s New York or generally, across the country,” Niederpruem said. “It’s difficult to underwrite, especially big urban centers. [We’re] looking at office deals, but with a more fine-tuned pencil to figure out how to see our way through.”

The market needs data before any meaningful moves are made on the office front, Schuh said, adding that the sector needs “leasing and investment sales activity to see where new valuations are. We’re cautious, as we’re supposed to be, waiting and watching.”

Overall, there are not a lot of deals on that front that are “being consummated yet, but that’s not due to a lack of interest,” Sroka said of investment sales.

On the new construction front, loan requests have been pouring in over the last six months, Niederpruem said. “Developers are optimistic by nature,” he said. “Most of the construction lending that’s getting done is around multifamily or industrial — most on a spec basis and a lot are built-to-suit for Amazon, and the like. It’s very competitive in the bank market.” 

There’s less competition for new construction loans outside of the bank realm, due to the inherent equity risk in play, but bridge financing has ballooned, Schuh said. It will continue to have a significant place in the market until things stabilize, he added.

“[You] underwrite doing a lot of sensitivity around rents and occupancy, stressing those lower than the sponsor’s pro forma — that couldn’t be more relevant now — and stressing exit [cap rates] higher,” Schuh said. “The construction we’re looking to do is to best-in-class sponsors, [as] construction loans generally have a substantial amount of equity at risk.

Because of that, there’s “such a robust activity for bridge loans right now, so once [a project is] built, people are willing to take the risk on the lease-up of deals, even for office buildings, believe it or not,” Schuh added.

Many brokers have been pushing deals in high-growth secondary markets throughout the pandemic, and that remains true following the first quarter of this year, said Jonathan Schwartz, senior managing director and co-head of New York City capital markets at Walker & Dunlop.

“We’re pulling out to high-growth markets around the country, like Nashville and southern Florida,” Schwartz said. “[Our] clients are migrating out of major metros, like New York, and have gone down to those markets in an aggressive fashion. The uptick outside of major metros, that will continue … but major metros will certainly come roaring back.”

Schwartz said his group has refinanced two hotel assets in the last 45 days in Florida, one of which was in St. Petersburg: a $130 million, floating-rate loan from Blackstone at 65 percent of cost.

Schwartz spoke as part of the fourth and final panel of the day, “High-Level Takeaways on Future Investment & Lending Trends.” He was joined by Midge Brogan, a managing director of commercial real estate debt at AllianceBernstein (AB) and CFO of AB’s CRE Income Fund; Jason Kollander, co-head of real estate credit at MSD Partners; Sebastian Post, a vice president of acquisitions at Fisher Brothers and a managing director at Lionheart Strategic Management. L.D. Salmanson, co-founder and CEO of real estate data firm Cherre, moderated the panel.

The migration of people, equity and debt capital to “high growth, low tax” markets created what Kollander called an “explosion” beyond core urban markets, but the magnetism of those major urban centers is inevitable, he said.

“They will attract significant capital, but it will take a few months to come back,” he said.

SL Green Realty Corp.’s recently announced $2.25 billion refinancing of its massive tower One Vanderbilt in Manhattan, a deal that could see the real estate investment trust cash out $1 billion, was a “testament to the New York City marketplace,” Post said. “Office is not dead, but urban cores will come back.

Talented individuals happen to want to live in big cities.”

One Vanderbilt is, of course, a newly built, trophy behemoth full of credit tenants, the type of rosy picture that would provide certainty and make cash flows easier to underwrite, Schwartz said.

The struggle, Schwartz added, “is selling a value-add or lease-up play in urban markets. You mitigate that with sponsorship and good real estate fundamentals. We’ve been successful recently in selling the fact that COVID is a short-term blip in the grand scheme of the office market.”

For urban offices to lease up, landlords are going to need to provide more concessions, higher tenant improvement allowances and more free-rent periods, Kollander said. There will be a “flight to quality,” as higher-quality office buildings will be easier to lease up, he added.

“You can get the lender over the hump, structuring around the [rent] roll or underwriting a certain rent to get a loan done,” Schwartz said. “It’s not a bad time to borrow money, even in the office space, if you can sell the story.”

Source: Commercial Observer

Real Estate investment firm Black Salmon recently closed on the purchase of its first hotel asset, Pelham Hotel in New Orleans, and it hopes to find more buying opportunities ahead. The company formed a joint venture partnership with AMS Hospitality last December with the intent of acquiring about $300 million in hospitality assets by summer 2022.

The company also is seeing firsthand the competitors lining up to pounce on opportunistic deals in a market that might have as much as $250 billion targeting distressed opportunities. “The market is flush with foreign and domestic institutional capital looking for distressed assets, including properties in the hotel sector,” says Stephen Evans, managing director of Black Salmon. Opportunity funds in particular have raised significant capital with promises of outsized returns regardless of the sector, he says. “This has created a competitive and crowded buyer market. However, this does not mean that there are no opportunities for strong risk-adjusted returns,” he says.

AMS and Black Salmon are targeting assets that can be acquired at an attractive basis from their pre-COVID-19 value where additional capital can be deployed to reposition the asset. Their focus is on smaller properties with local ownership, which are often overlooked by larger institutions. “This allows us to be selective while uncovering opportunities with less competition,” adds Evans. The JV is targeting limited and select-service hotels located in the Sun Belt, particularly those assets near convention centers or tourist attractions that will benefit from return of business and leisure travel.

The questions facing opportunistic investors is whether the window of opportunity may be closing along with an economic recovery that appears to be gaining momentum. How much distress is yet to emerge, where will pockets of opportunities exist, and exactly how much discounts to pre-pandemic values will buyers be able to find?

“I think we are still at an early stage in the cycle in terms of seeing distress realizations,” says Xiaojing Li, managing director, CoStar Risk Analytics. As was evident in the 2008-09 recession, it takes time for distress to work through the system. Li estimates a roughly nine-month span for troubled loans to go through the different workout stages with lenders before moving to a final resolution of a note sale or foreclosure, and potentially another two years to get liquidation sales done. The forbearance that was granted could further stretch those timelines.

Opinions vary on outlook for distress

Last November, CoStar developed a model forecasting distressed sales in 2020 and 2022 that ranged from a best case scenario of $92 billion to $370 billion if the economy slid back into a severe recession. The most likely level given the information at that time was an estimate of $126 billion in distressed sales. According to Li, that $126 billion projection could end up being lower due to the positive changes that have occurred in the economy over the last few months. But, inevitably, there will still be a big amount of distressed assets that come to the market over the next two years. Likely, the volume will still exceed the $95 billion in distressed sales that occurred after the last recession in 2010 and 2011, she adds.

One reason for that higher forecast is that the overall commercial real estate market is bigger with values that have increased more than 60 percent since the 2008-09 recession, notes Li. “So, even if the percentage of distress is comparable or even smaller, the dollar amount will probably be bigger than what we saw in the last recession,” she says.

Yet some believe that much of the capital raised to acquire distressed assets may fall short of investment goals. Continued expansion of COVID-19 vaccinations, easing business restrictions and the approval of the $1.9 trillion stimulus package have resulted in greater confidence in economic recovery. That optimism is causing economists to increase GDP forecasts for 2021. For example, in early March, the OECD increased its growth forecast for U.S. GDP to 6.5 percent in 2021, up from 3.3 percent in December.

“Now that the vaccine is coming out and stimulus checks are being received, there is sort of a ‘hope springs eternal’ attitude that I’m hearing daily about the recovery,” says Brian Stoffers, global president, Debt & Structured Finance at CBRE. People are returning to offices, shopping in stores and traveling again, and that has very positive implications for real estate. “We didn’t think there would be a tsunami of distress to begin with. So, we haven’t changed our view,” notes Stoffers. That being said, there will be some distress that will be felt, including distress that was in motion before the pandemic, he adds.

Identifying pockets

Certainly, there have been examples of distressed sales that have already occurred that have produced a “wow” factor in the steep write-downs in value. Hotels that rely heavily on tourism and convention business have been hardest hit. For example, investors paid less than half the face value on the $195 million note on the Crowne Plaza Times Square in Manhattan late last year. However, the distress that is emerging is highly situational. In some cases, it may be due to the location or geographic market, specific tenancy issues, obsolescence or operator issues. The challenges for investors are both finding those opportunities and beating out other capital vying for the deal.

The CMBS delinquency rate shows the main pain points in the industry. The overall delinquency rate has continued to improve over the past several months, dropping to 6.8 percent in February, according to Trepp. However, distress remains acute in lodging and retail with delinquencies of 16.4 percent and 11.8 percent respectively.

About $22 billion in CMBS loans, across roughly 1,000 properties, were reappraised in 2020 with values lower than their original underwritten values, according to Li. Retail represented 40 percent of those loans and hotels accounted for 35 percent. “Those are perfect candidates for distressed sales if they ever come to the market,” she adds. Another data point that illustrates the level of distress is that 39 percent of the loans that were reappraised saw their values drop from original underwritten values by more than 50 percent, says Li.

Office remains a wildcard, and potential distress may take longer to emerge in that sector. Core CBD office assets in gateway markets have suffered disproportionately in metros such as San Francisco and New York City. Those markets were among the first to be impacted and last to recover, and office properties will be further challenged by new construction that had been occurring pre-pandemic, notes Nancy Muscatello, Managing Consultant, CoStar Advisory Services. “We may expect some pricing adjustment as a result of some of the headwinds that are going to continue to face those areas,” she says. The flip side is that there is still investor demand for those assets, particularly from international investors who have long-term hold strategies. That demand could help to prevent any significant adjustments in pricing, she adds.

The K-shaped economic recovery has produced some distinct winners and losers, and it remains to be seen what changes in demand for will exist long term. It is not yet clear whether or not business travel and meetings & conventions will fully revert to pre-pandemic levels, or more meetings will be conducted virtually in the future. There also is speculation about how work-from-home trends will impact demand space over the long-term.

Despite uncertainty around potential secular shifts in demand, the prevailing attitude is becoming much more positive, says Stoffers. “This is not a real estate crisis caused by poor underwriting and aggressive lending, rather it is due to the pandemic that changed the dynamics of some property types in particular,” he says. Additionally, there continues to be debt available to reposition and stabilize assets. So, some investment groups that have raised capital for distressed buying opportunities may be disappointed in what they are able to achieve, he adds.

Source: Wealth Management

C-PACE is commercial real estate financing programs use authority given to a municipality to offer financing for property owners to fund energy efficiency and renewable energy projects on existing commercial structures. The property owner voluntary agrees to repay the financing through a special assessment. PACE provides financing for these types of improvements over time without requiring the property owner to make a large upfront investment.

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PACE financing is available through the Energy Improvement Corporation’s Energize NY OPEN C-PACE program (EIC).

Energy Improvement Corporation is a New York State non-profit, local development corporation that operates EIC OPEN C-PACE for the benefit of its member municipalities, which include counties and cities across New York State, as well as towns in Westchester County

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