LOS ANGELES-The multifamily real estate industry is in the fourth or fifth inning of the distress cycle. That was the general consensus among experts that participated in the session, “Distress Chess Match: Whose Move?” part of yesterday’s RealShare Apartments 2010 conference in Downtown L.A.
Of the $870 billion of outstanding multifamily debt in the market, GSEs hold 43.6% of the share, noted Jess Bressi, a partner with Luce Forward and moderator of the panel. Coming in second was banks, which hold 24% of all multifamily debt, and CMBS rounded out the top three, with 12.4% of the total. But the numbers don’t tell the whole story of the distress market; there are many moving parts to getting deals done today, according to the special servicers and investors on the panel.
There hasn’t been much movement in terms of distress transactions taking place. One reason is the difficulty in finding financing. Gary Tenzer, senior director, principal and co-founder at George Smith Partners, shared that Fannie Mae and Freddie Mac won’t touch such deals, and banks rarely lend to distressed situations. D. Scott Lee, senior managing director of LTVentures, added that mezzanine debt isn’t penciling out in most cases, either. Private, bridge or hard money lenders are willing to lend to distressed situations, but as Stephan Kachani, vice president of Lone Oak Fund, pointed out, they tend to prefer class C properties in tier-A locations.
Today’s distressed deals, said Lee, tend to involve class B and C properties, and even those are seeing mid-6% cap rates. Location plays a large role in the discounts investors could find in distressed assets. Larry Scott, president of Allegiance Realty Advisors pointed out that there’s a cap rate spread of anywhere between 150 and 200 basis points between distress deals in coastal cities and non-coastal markets. “If you’ve got an asset on the coast, it may be a good time to consider selling, unless you're waiting for values to rise again,” he said.
Young Hong, president of Strategic Property Associates LLC, said there are great opportunities to buy distressed assets out of bankruptcy deals, such as those that traded as a result of Bethany Group’s bankruptcy. And with bankruptcies likely to rise, expect to see more assets put on the market. Most of those opportunities will likely involve bank debt. When it comes to dealing with defaulted loans, Bressi indicated that banks are more likely to opt for foreclosure, whereas CMBS lenders/servicers would be more apt to do a workout or restructuring. But there will also arise some opportunities to buy properties through a forced sale by CMBS, he added.
For borrowers that want to optimize their chances of getting a loan modification, the panel had some advice: be nice and sign pre-negotiation agreement; bring money to the table, since many loans need re-margining/rebalancing/right-sizing; provide the lender with all the requested information and documents; keep paying cash flow; and complete a reasonable and detailed business plan before the lender/servicer is even contacted.
Want to continue reading?
Become a Free ALM Digital Reader.
Once you are an ALM Digital Member, you’ll receive:
- Breaking commercial real estate news and analysis, on-site and via our newsletters and custom alerts
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical coverage of the property casualty insurance and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor
Already have an account? Sign In Now
*May exclude premium content© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
