Wary of Waiting for Distress, Some Funds Become Opportunistic Instead

In 2008 and 2009, a lot of groups put together distressed funds to buy struggling commercial real estate assets from ailing owners and banks. But as the next few years played out and banks worked with many borrowers, those funds weren’t able to make the distressed buys that they initially anticipated. In some sectors, such as apartments, these opportunities never materialized at the level that investors expected.

“Some people started out searching for distressed assets,” says Michael T. Fay, principal, managing director and global head of Avison Young’s asset resolution team. “They never were able to buy them. So, therefore, they had to call it [their fund] something different.”

Eventually, those funds were rebranded for value-add or opportunity purchases. Fay thinks these groups have learned their lesson from The Great Financial Crisis.

“I think people are going to be very cautious about what they call their funds, but also I think they will also cast a wider net of what their goals and objectives are for these funds,” Fay says. “As opposed to calling it a distress fund, I think many people will call them opportunistic funds.”

By forming an opportunistic fund, Fay thinks buyers will be able to cast a wider net. They can purchase distressed properties, but they can also make value-add purchases, for instance. 

“They can walk the line on both sides, and the investor pool that they’re bringing in will allow them to do certain things in that way, in my opinion,” Fay says. “It allows you to have a wider net for your goals, and strategies for these investments.”

As an example, Fay said he recently consulted with a group about their investment objectives. “They would love to buy distress, but they didn’t want just to do distress,” Fay says. “They thought it [being a distress fund] was going to limit them on some of the other opportunities that they might see because they might be cut out of the process. They’re afraid they may be blocked out in some ways, as opposed to being seen as a true player for whatever asset they might be competing for.”

But there is still a place for traditional distressed buyers in the process. “There is always going to be some distress funds that will come in with little or no due diligence and close within days,” Fay says. “They’re going to sacrifice by doing that. It all depends on the motivation of the seller or the group that’s selling.”

Fay says there will be plenty of assets for these distressed funds to pick through as this COVID-19 recession plays out. The real estate veteran sees similarities to how Resolution Trust Corp. [RTC], sell-off in the early ’90s.

“In the RTC days, there was not a lot of money out there,” Fay says. “Today, we have a lot of money [waiting on the sidelines].”