A flood of distressed assets is headed for the market. There has been some debate about the future market for distressed assets as a result of the pandemic. Some experts have argued that better underwriting will help property owners hold on to properties through the pandemic. However, as the public health crisis wears on, property owners are left with few options to cope with income loss. The dynamic has promised an increase in distressed assets.
“If you look at assets that were impacted by COVID, like hospitality, which has been devastated, retail and office, there is true distress in the commercial real estate sector as more and more time passes where there is impact to the economy,” Pat Jackson, CEO of Sabal Capital Partners, tells GlobeSt.com. Securitized loans, for example, don’t have the option to be extended after a certain period of time and they will go into special servicing. It will start the drumbeat of foreclosures.”
In most economic downturns, distressed assets arrive more immediately; however, there was a lot of hope and support to avoid a surge in defaults. “It is taking a little longer than usual. There was a lot of hope in the marketplace, but the second flare up took a lot of wind out of people’s sales,” says Jackson. “I think even now, people are talking about what happens when people go back to school—will there be a second flare up? People are skeptical that the bell curve we are watching from a national perspective is on a permanent downward trend. No one knows. Those are issues that will impact the investment sector.”
In many ways, the second way helped to ensure the new reality. “It wasn’t inevitable,” says Jackson. “Now that the pandemic is elongated, I think that people are starting to recognize that this is going to be a lot longer than the early idea suggested. Whatever misinformation was in the marketplace about the recovery cycle and the potential recovery cycle, I don’t think anyone believes that anymore.”
Jackson has already started to see distressed assets, particularly in the hospitality, come to market. “We are already starting to see it. It has gone from being the promise of distress to the reality of distress,” he says. “It is undeniable that there are real estate investments that are made that are loans that can’t continue to pour money into an asset that is not cash flowing. There is some point where the investors don’t have the financial wherewithal to keep the loan current. We are moving from denial to acceptance.”
Sabal will invest in the distressed market. While it is early, Jackson predicts that the firm will focus on hospitality first, where there is the most opportunity. However, he was clear that he wouldn’t lend on hospitality assets, at least not until post recovery. “If I had to make a prediction about where we will start investing first, it will likely be in hospitality,” he said. “We have a lot of different legs to our business. We aren’t lending in hospitality, because who wants to take that bet? But we are taking a bet that we are going to have a recovery, and in terms of buying distressed debt and to the degree that we can buy real estate at a discount, hospitality has an upside scenario. We believe that there will be a lot of distress in hospitality coming to the market.”
By Kelsi Maree Borland /Globest