Risk analyst explains how mortgage pros can win in this historic environment
After Q3 of 2020, commercial real estate (CRE) research firm CoStar Group presented its predictions for CRE going into 2021 and beyond. It estimated that around $126 billion in CRE would be forced to sell at distressed prices through 2022. While a multitude of factors influenced that number and outcomes could vary significantly based on the shape of the US recovery and vaccine rollout, the $126 billion figure has the headline-grabbing weight of being larger than the value of CRE sold at distressed prices after the great financial crisis.
Xiaojing Li (pictured), managing director at CoStar Risk Analytics, is quick to point out that between 2007 and 2019 the underlying equity of all commercial real estate rose by around 60%. That means that as a percentage of US CRE equity, the $126 billion represents less than post-2008 distress sales. It remains, however, a significant number with the potential to reshape the CRE landscape for, potentially a decade to come. Li shared some of her insights and outlooks with MPA and explained how commercial mortgage professionals can position themselves for success in this market.
“The biggest difference between this recession and the last one is, while every recession is uneven, this one is particularly uneven,” Li explained. “The hotel, lodging and retail sectors are particularly distressed while offices, apartments and warehouses are relatively resilient right now.”
Li estimates that despite a relatively small share of the total commercial real estate market, hotels could represent a full one third of these distressed assets. While multifamily as a whole has performed relatively well, Li also predicts some distress in urban core multifamily and properties at the luxury end of the market.
While vaccine news should be treated as a positive for the future, Li emphasized that it is not a panacea for all these distressed assets. Rollouts will take time and vaccine uptake rates might not make a fast difference. While Li is cautiously optimistic, she emphasized that for some of these real estate sectors the damage has already been done.
As for the buying spree of distressed assets Li predicts, she explained that these purchases will happen over a prolonged period of time, perhaps taking up to 10 years before all the dust settles. That said, some are already beginning, mostly in the New York hotel space, notably with the sale of the $195 million mortgage on Vornado’s Times Square hotel for $90 million.
Currently, Li explained, there are estimates of around $200 billion in capital waiting on the sidelines to begin purchasing distressed assets. Most of those buyers are private equity firms and asset managers that have come through the pandemic well-capitalized. Companies like Blackstone have the means to win out in a fire-sale market.
While it is too early to predict the shape of the post-pandemic CRE space with detailed accuracy, Li is of the opinion that there will be a period of consolidation by major players as they seek to shore up their own strengths or acquire competitors more adversely impacted by the pandemic.
For commercial mortgage professionals, Li believes the key to winning out in this new market of distressed assets and well-capitalized sharks is staying informed. Detailed data is yet to come and mortgage pros who get ahead of the information curve will be able to win.
“Now granularity matters,” Li said. “Overall, you can see property sectors outperform or underperform but definitely there’s going to be losers and the winners in different geographic locations and in different sub sectors. So, you need granular data to help you navigate and try to find the opportunities and where the risk resides. That’s why the information matters.”