Yieldstreet's Rosen: 2020’s Second Half is When the Real Pain Starts

As some parts of the country shut down again, many observers expect to see the full economic fallout of COVID-19 in the third and fourth quarters.

You can put Yieldstreet’s Senior Director of Real Estate Mitch Rosen in that group. In Q3 or Q4, he thinks there could be a lot of distress in the market.

Right now, Rosen says about 90 percent of the lenders that he is talking to are working through fundamental issues with their borrowers.

“The court systems and the governmental view on the situation is to work with your borrowers,” Rosen says. “Don’t take drastic action and punitive measures against people. Act in good faith if they’re a good borrower. I think that’s a broad message that’s been prevalent in the marketplace in commercial real estate.”

But that can’t go on forever. “If we see a much slower recovery, I don’t see how assets like hotels, retail, some office properties that are vacant and condos don’t encounter some real pain in the third and fourth quarter as we go into 20121,” Rosen says. “It is deal and borrower dependent. But I’m of the view that we’ve certainly not seen anything close to the wave of issues that will arrive.”

Rosen says the main questions revolve around what strategies borrowers and lenders take if problems start bubbling up in the Fall.

“I think people don’t realize how long the workout process is in commercial real estate,” Rosen says. “With the public markets, you can drop 40 percent [of value] in three weeks, but real estate doesn’t work that way. The peaks and troughs are far longer in duration, and the distance between them is also much longer. I think the impact of what we see now is not going to be felt for six to nine months out, at least.”

If borrowers have confidence and see the light at the end of the tunnel, Rosen says they may put more capital into their assets or find some rescue equity. But if the borrower cashed out equity and their basis is zero, they don’t have a lot of options. “I think you’ll see a lot of guys get the keys back,” Rosen says.

Rosen predicts that many owners of hospitality properties will hand the assets over to their lenders.

“In their mind, it’s good money after bad trying to salvage these, given where their basis is and where they think cashflow can go in the next one, two to three years,” Rosen says. “So they’re making a bet to keep the cash they have on hand and rebuild the business.”

Some borrowers are also negotiating with lenders to modify and maybe reduce their loan balance and take a hope note.   The special servicers took that approach in 2008 and 2009. “In many cases, I would say it worked better if the borrower kept the asset,” Rosen says. “The lender stayed current, at least on the note piece. And in some cases, they got recovery on the hope note, which was not expected when the deal was cut.”