The Market for Distressed Assets Is Only Beginning

Opportunistic investors are already actively seeking distressed opportunities, but after eight months in the pandemic, many more distressed deals are likely to hit the market next year. This new wave of COVID-19 cases and new stay-at-home orders are only putting more pressure on businesses and solidifying what will become a thriving investment industry. Ready and well-positioned investors will be able to buy assets for pennies on the dollar, according to Peter Ballance at Stroock & Stroock & Lavan.

“In the short term, as the pandemic drags out and new protective orders are issued by state governments, many offices, restaurants, hotels, stores and other commercial spaces where people spend their time and/or money will remain either closed, or mostly empty,” Ballance, a partner at the firm, tells Globest.com. “As a result, many commercial properties are facing a combination of tenant defaults, no new demand for space and no readily available capital.  For property owners that are unable to identify solutions to keep their assets afloat, defaults under their real estate financing are inevitable.”

These are opportunities stemming from the impact of stay-at-home orders and reduced activity, but permanent changes will also create distressed asset opportunities further into the future. “A longer-term change to the market will likely result from the pandemic driven acceptance of the work-from-home model,” says Ballance. “It has become clear that almost anyone who gets their job done with a computer and a phone can work anywhere, not just an office in a commercial building.”

Office owners aren’t alone. Retail owners will also have to adjust to long-term changes. “Digital retailers like Amazon have revolutionized shopping habits to the detriment of brick and mortar stores,” says Ballance. “As companies downsize their office requirements and retailers close up shop or move to an on-line model, the resulting decline in demand for office and retail properties will fall short of the pre-pandemic underwriting of the real estate loans secured by those properties, and again, loan defaults are inevitable.”

Lenders will have to respond to these changes as more owners face challenges with rent collections. “With an overstocked inventory of distressed loan assets and an uncertain road to recovery, a number of lenders are going to be looking to sell these loans,” says Ballance. “For cash-flush investors that are looking for a real estate bargain, this could presents a great opportunity.”