Buying Opportunities Could Arrive in November
While opportunistic buyers will be able to buy distress, one observer thinks funds and REITs could sell as they look to recalibrate after the pandemic.
Over the last decade, a lot of funds formed, anticipating a downturn in commercial real estate. In March, as Coronavirus shutdowns spread across the country, that moment arrived.
“Before the pandemic, everybody kept saying, ‘Oh, we’re in the ninth inning [of the cycle],’” says Michael T. Fay, principal, managing director and global head of Avison Young’s asset resolution team. “That has been going on for four or five years. All of a sudden, the pandemic hit and a lot of these groups were in the middle of raising money or had money.”
With the federal government pumping money into the economy, Fay says there is more capital in the market now than in previous downturns. This capital manifests itself in opportunistic funds, distressed funds and mezzanine equity loans, among many other things. Right now, funds are holding onto this cash. “There are a lot of people on the sidelines right now sitting on cash,” Fay says.
Some of the groups who are sitting on cash are looking at ways of entering the market as lenders.
“A lot of other groups are trying to figure out ways to lend money to be able to get that 8 to 10 to 12 percent return with equity, mezzanine equity and hard money lending,” Faye says. “You’ve got all of these different funds that are going to be buying.”
Fay says those funds could be looking to buy notes or mortgages from banks and special servicers. “We see a lot more money out there, and there’s a lot of money chasing deals,” he says. “My belief is starting in November and going through next year and probably the year after, we’re going to see all sorts of opportunities.”
While investors will have opportunities to buy distressed debt, there will also be chances to secure properties.
“There could be opportunistic sales where an investment group or a REIT is cycling out of one product and into another product,” Fay says. “Maybe the asset has some vacancies, they believe they have already gotten the majority of their return and they want to sell.”
In other cases, these groups may want to cycle out of one asset class or region and move into a new one after there is a vaccine or therapeutic solutions to the coronavirus.
“There is going to be a lot of movement, in my opinion, as we start to understand the risks post-pandemic,” Fay says.
While there are a lot of questions going forward, Fay is confident a lot of money will find its way into real estate.
“You cannot rely on putting money in banks or bonds in this low-interest-rate environment,” Fay says. “You’re going to look at real estate and maybe some REITs.”