These Sellers May Start Moving Distressed Assets Sooner Rather Than Later

A lot of funds are lining up to make a play for distressed assets. If they don’t have the patience to wait for things to cycle through banks and servicers, Mark Foster, attorney at Snell & Wilmer, says there is one group that may soon be ready to make a deal.

“I think the most opportunity [for purchases] is going to be with owners who are older, over 65, and who have done a good job of building a pretty good portfolio,” Foster says. “There is a crazy amount of uncertainty, and they may want out. So they’re willing to sell it [their asset] at a discount to get out.”

When they sell, Foster thinks they’ll prefer a buyer that can move quickly. “They want to sell to somebody who is able to close a deal quickly,” Foster says. “They’re willing to sell it if dips in value because they’ve owned it forever.” 

Foster says special servicers and banks will move slower than these sellers. “We’re at least a year or a year-and-a-half away from those portfolios coming in at a place where people can get some value,” he says.

Once those assets hit the market, there are questions about how they’ll be priced. “I know people are struggling with that,” Foster says. “Nobody really knows.”

Foster thinks a lot of people will value distressed assets by just taking a certain percentage off of projected revenues

“One [way to value a property] is to just take a percentage discount on your pro forma from a revenue standpoint,” he says. “Then you insert a period of time for rents to recover. There’s no certainty around that period of time. It’s like they’re saying, ‘Hey, I’m going to take 35 percent off the projected revenue for this asset and underwrite it to that to determine the price.’”

Foster has also seen other people that are focused on changing uses in a specific asset class, which makes doing the pro formas a little harder. For instance, he knows one buyer who is laser-focused on the struggling retail sector.

“When he does a pro forma on a medium-sized retail center, he wants to change the tenant makeup to focus on lifestyle, which implies more high-end customers,” Foster says.

In this case, that means fulfillment centers for retail to give people the option to either pick up things they’ve ordered online. That strategy can also get them into stores that provide experiences, such as the Apple store or the Nike store. “It’s creating a shopping experience because people still like to touch and see certain things,” Foster says. “It is taking that approach as opposed to keeping a lot of inventory that necessarily doesn’t move.”