The next economic crisis: an empty sales area


There is also the fear that directing significant relief to the industry will be seen as a “gift to the friends of the president” since Donald Trump has made his fortune in commercial real estate, said a lobbyist frustrated by the lack. the traction the problem is generating among decision-makers.

“Sometimes people forget the depth and breadth of what commercial real estate is,” said Mike Flood, senior vice president of commercial and multi-family policy at the Mortgage Bankers Association. “What is at stake here is both the ability for people to stay in their apartments and the ability for people to go to work. So, unless there is a stimulus, there is a lot less to do once we get back to normal times.

A major problem is that no one knows how long the drop in commercial real estate will last. Business travel is not expected to resume for at least a year, so hotels are being hammered out. And while office buildings have yet to bear the brunt of the recession – offices tend to have long-term leases – this will change as many businesses rethink how they operate, with working from home becoming Standard.

The number of commercial loans that have been packaged into “special service” securities – where distressed loans are transferred to a new manager hired by bondholders to negotiate a payment plan on their behalf – has been steadily increasing. increase since March.

And it has become clear that the virus will continue to reduce income for some time, so even landowners who have been able to repatriate payments – in part thanks to the now lapsed relief measures passed by Congress – could start to slide.

The loss of paying tenants could trigger a wave of real estate write-downs and possible foreclosures on everything from shopping malls to apartment buildings. But it is not just a pocket of wealthy investors that will suffer from widespread depreciations. Eighty-seven percent of public pension funds and 73 percent of private pension funds hold real estate investments.

Borrowers seeking loan relief or considering refinancing also face problems, as the uncertainty caused by the virus has left them without a clear projection of future income streams for their buildings.

“Every lender tries to help regardless of the form of financing, but sooner or later the borrower needs customers,” Flood said.

The damage is already manifesting itself in the securities market, where mortgages are packaged into bonds sold to investors, which are then repaid by mortgage payments.

One in 5 loans clustered in commercial mortgage-backed securities are on special watch lists, where loan managers – the companies that collect mortgage payments and advance them to investors – report potential barriers to future payments, such as the move of a major tenant.

Since the crisis has hit some places and sectors much harder than others, it is difficult to get a clear and comprehensive overview of the market’s problems – one of the reasons lobbyists have struggled to make decision-makers understand the urgency. Some assets have been wiped out, while others are thriving.

Hotels and retail, which together account for 40% of the commercial mortgage-backed securities market, were the hardest hit. Months after the locks were lifted, 1 in 2 hotel rooms remain unoccupied. City hotels, which have some of the highest operating costs, are the worst off, with just 38% occupancy.

And retail, which was already struggling before Covid hit thanks to the boom in e-commerce, has seen its decline accelerate. These aren’t just small, linear shopping malls: the owner of the $ 1.9 billion Mall of America struck a deal with his special duty agent in August to avoid foreclosure.

Today, a quarter of all CMBS hotel loans are subject to special services, up from just 1.9% at the end of 2019. And 18.3% of personal loans are for special services, up from 5 % at the end of last year.

Apartment buildings, on the other hand, have performed well – so far. Industry analysts are anxiously watching for signs of additional tenants missing out on rent now that the initial push of economic relief included in Congress’ $ 2 trillion CARES bill passed in March is fading.

Apartment owners are also being blocked by a nationwide ban on evictions for non-payment of rent put in place by the Centers for Disease Control and Prevention last month. The ordinance did not provide any funding for housing assistance – effectively requiring landlords to subsidize housing for troubled tenants until it expires on December 31.

“The worst-case scenario is taking the shiny asset of all commercial real estate and potentially creating a liquidity crisis, and quite frankly, a situation where people are being kicked out,” Flood said. The unfunded eviction ban, he said, “transfers the risk to the borrower and the lender.”

Homeowners trying to get relief on their loans, on the other hand, find it difficult, especially in cases where the loan has already been put down as collateral.

“The difficulty here is that the borrower and the lender have to determine the value of the asset today,” said Lisa Pendergast, executive director of the Commercial Real Estate Finance Council, a trade association representing lenders, investors and mortgages.

“What do you think your property will be worth in three months, six months, six years?” Pendergast said. ” It depends. “

Part of the problem is that there haven’t been enough commercial real estate transactions – sales were down 68% in the second quarter from a year ago – to assess how much property values ​​have really fallen. , leaving buyers and sellers with extremely divergent views on what a property is worth.

The lack of clarity on the current value of an asset is particularly important for loans broken down and grouped into securities held by investors. A bank may give short-term relief to a borrower and reassess the problem in a few months, while a borrower whose loan has been packaged in a title has to go through a more complex process to gain approval from various investors for adjust payments.

Special managers have to model future payments for bondholders, a difficult task when you don’t know what a building is worth right now or if it will bring in income anytime soon.

“This is where it all falls apart – not knowing the value of a property,” said Michael Bright, CEO of the Structured Finance Association, a trading group representing 370 companies involved in securitization. “It’s a pretty big contribution and nobody knows it.”

A May survey by the American Hotel and Lodging Association found that only 15% of borrowers whose loans had been packaged and sold to investors had received loan relief, compared to 80% of borrowers with bank loans.

Take the example of a hotel owner whose business was going well before Covid hit. If the owner’s loan is held by a bank, they can develop, for example, a six-month deferral plan or a longer-term loan with the bank to deal with the problem until there is a vaccine.

But if the loan was sold to investors in the securities market, the owner must pay full monthly payments, which managers then pass on to investors. He can work with the manager to defer payments, but investors, depending on the risk they are exposed to, may hesitate.

In the long run, the source of funding doesn’t make much of a difference – eventually, a bank will have to write off a property that doesn’t recover. And industry analysts don’t know which properties will.

“The main question is probably structural economic changes or changes in buying and living behaviors,” Bright said.

“I think everyone is trying to figure out what a post-Covid world means for commercial real estate,” he said. “I hope people want to travel and reunite soon, but we don’t quite know that yet.”


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