Distress investors have been racing to the market in anticipation of snapping up deals. For the most part they are finding, to some chagrin, that there are little properties and loans available at deep discounts. There has been much positing about when these transactions will come to market—the end of summer and the fourth quarter are two popular timelines—but a better question might be to ask, why are there no distress deals available now? That answer in turn becomes a straight line to the question of when.
CBRE analysts believe one major reason for the lack of distress on the market is that most lenders, outside of CMBS, are being very accommodative to troubled borrowers.
And even some CMBS borrowers have been able to navigate the structure's complicated rules to gain loan forgiveness. Urban Edge Properties, to cite one example, just announced it has completed the refinancing of its mortgage loan for The Outlets at Montehiedra, in San Juan, Puerto Rico. The existing $119 million CMBS loan consisted of an $83 million senior note and a $36 million junior note. The $36 million junior note will be forgiven, according to Urban Edge, and the senior note will be replaced by a new ten-year $82 million mortgage provided by Banco Popular de Puerto Rico.
In short, whether the lender is a bank, conduit, debt fund or life company, we are in an era of forebearageddon—a coin termed by Brian Stoffers, global president of CBRE's debt and structured finance group. Stoffers used the phrase during a webinar recently hosted by CBRE.
Banks, in particular, have been having constructive and accommodative conversations with clients and they are more likely to keep troubled loans and properties on their books, he said during the online event. "I don't think we will be seeing large, distressed transactions coming out of the banks."
Loan sales as well, while they have picked up materially, are seeing few signs of distress, Patrick Arangio, vice chairman of CBRE's national loan and portfolio sale advisory, also said during the webinar.
"Buyers have been reaching out to us, expecting a glut of non-performing loans," Arangio said.
But the type of sales that are happening are typically portfolios backed by assets that were less favored before the pandemic, he said. The properties might be functionally obsolete, be older boxes, have poor window lines or may be in secondary locations within their markets. Arangio believes that these investors will start to fixate on these shortcomings in ways they did not before COVID-19 and they will eventually come to market.
Other loans are being sold for liquidity, he continued. Then there are those loans that, while paying in the short-term, are expected to experience a downturn at the property level. Some of these are coming to market, he noted.
Arangio as well points to the thoughtful approach lenders are taking in negotiations with borrowers and he expects this to continue for some time. How long exactly? That is the billion dollar question, Arangio said.
There is no easy answer because besides lender forbearance, the property markets are also being supported by government relief programs and the federal expansion of the unemployment program, which is being used by many apartment dwellers to pay their rents.
It is hard to say when these programs will be stopped and when lenders will become less forgiving with forebearance, Arangio says—and how that will impact the distress loan market.
His best guess: "We expect the expiration of forbearance may lead to a material increase in non-performing loans in next 3 to 6 months," he says.
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
