$270B in CRE capital is on the sidelines. How much of that sum could go into distressed real estate?
It comes at a time when the broader commercial real estate industry is watching what’ll happen to an estimated $1.9 trillion in commercial real estate loans set to mature in the next four years. In particular, the office market is being closely observed as companies depart big blocks of space in older buildings in favor of consolidating into smaller offices in higher-quality buildings.
In September, the overall commercial-mortgage backed securities delinquency rate was 4.39%, an increase from 4.25% the month prior, according to Trepp LLC.
While more distress is expected, it hasn’t fully emerged yet, as lenders work with borrowers on short-term extensions and modify and restructure loans when possible.
“We have to wait for some of these properties’ debt to mature and a decision to be made,” Aaron Jodka, director of U.S. capital markets research at Colliers International Inc. “A lot of investors are waiting for their hands to be forced: If they can wait out their existing financing, they’re going to do that. At the point that they need to refinance or they have an occupancy loss that doesn’t allow them to cover their debt service, that’s when those events will take place.”
A lot of buyers don’t feel prices have bottomed out. There also are a lot of commercial real estate loans that, by today’s standards, have low interest rates, meaning more buyers are interested in assuming existing debt.
Jodka said there’s evidence of bridge capital being deployed, even for things like construction loans that will come due during the time of development, to help offset the rapid rise of interest rates since they were underwritten.
Although more distressed real estate deals are forthcoming, it may be a competitive process to take on those properties.
Especially compared to the global financial crisis, there are a lot more online real estate sales platforms that provide easy access to information about which properties are being sold, how they’re being marketed and other information, Aaron Jackson, the loan enforcement team leader of law firm Polsinelli PC’s financial services litigation practice group said. That may widen the pool of potential buyers.
“I think most of what buyers are going to see is not that they can go to the banks and get a steal before anyone else discovers a deal, but they are going to be caught up in an organized auction,” Jackson said. “If they want to acquire these types of properties, they’re going to have to fight for it a little bit.”
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