A Timeline for Distress to Hit the Market

While some people say it could take as long as three years for non-performing loans to hit the market, Jake Reiter doesn’t think the wait will be that long. 

Reiter, president of Verde Capital, thinks investors will see distress opportunities by the end of this year or early next year. 

What’s the holdup with distress offerings? 

Right now, Reiter says some people have not realized how dire the economic situation will be and are still “kicking the can and hoping that there’s going to be a comeback.” Also, lenders are working with their borrowers by converting amortizing loans to interest-only vehicles, among other things.

But Reiter doesn’t think the lenders will be able to offer indefinite help, especially if the COVID-19 situation worsens into the fall as people’s unemployment checks stop arriving.

“A lot of these loans are with special servicers or will be.” He says. “Deferrals from lenders are going to wear out.”

Reiter sees a very “liquid” market with distressed opportunities. “A number of the large funds raised billions of dollars and bought right up until COVID at very low cap rates and took on high leverage,” Reiter says.

As lenders and borrowers look for solutions, capital is mobilizing for opportunities. “I think there are a number of players that aren’t playing total defense right now and have liquidity,” Reiter says. “They are building liquidity to invest in what we believe will be some fairly serious distress from certain asset classes.”

But for right now, investors need to wait.

“You don’t want to buy too early because there’s really no discount,” Reiter says. “The pain hasn’t been felt [yet]. I think that’s coming.”

The firms that have capital lined up and move decisively will be the ones that perform the best. 

“It will be a limited time to get in and cherry-pick the right deals under the right strategies with the right operating partners,” Reiter says. “That planning is going on now. Some of it is really deliberate and strategic, and some of it is probably less [deliberate and strategic].”

Verde Capital’s goal is to get in early, but not too early. It seeks assets that are “distressed, but not dead.” Reiter is specifically focused on assets that may be shuttered today and need recapitalization. 

Even if it doesn’t take three years for distressed assets to hit the market, Reiter expects to see new funds started for those assets well into the future.

“It’s not unlike the funds that were formed to buy value-add multifamily in the last couple of years,” Reiter says. “Most people in the value-add multifamily space knew two or three years ago that the game was over. That didn’t stop huge funds from raising tens of billions of dollars.”