One Retail Owner Watches the Distress Market

During the Global Financial Crisis, Bayer Properties was able to secure distressed assets. Now, in the midst of the COVID crisis, Bayer Executive Vice President of Operations Doug Schneider anticipates history repeating and is very closely watching the current situation. 

“We’re starting to see it happen,” Schneider says. 

Some numbers from research firms back this up. According to Moody’s Analytics REIS, the retail sector’s vacancy rate increased by 0.2% in the quarter to 10.4%, which was the highest mark since 2013. Average asking rents and average effective rents fell 0.1% and 0.4%, respectively. 

Vacancies in malls hit their highest rate in 20 years, after rising 0.3% to 10.1% in Q3. The average mall asking rent declined 0.7% in the quarter and 0.6% over the year.

Those struggles are showing up in delinquency figures. Trepp reports that 30-plus day delinquency rates hit a near all-time high of 10.3% by June 2020. Retail delinquencies jumped to 18.1%, respectively, the highest on record for the CMBS industry.

During the financial crisis, CMBS distress took a while to play out. CMBS delinquencies and special servicing rates didn’t reach their peak of 10.3% and 13.4% until mid-2012, according to Trepp. 

Schneider says Bayer transitioned a number of assets in that era, collecting many of them from servicers.

“The goal would be to stabilize the asset while positioning the property for an acquisition and future capital investment,”,” Schneider says. “Initial leasing activity consisted primarily of renewals, extensions, short-term and temp deals in order to continue revenue generation while the expense side focused on contract re-bidding to ensure the right level of service was being applied at efficient pricing levels.”

Bayer Properties also managed assets in servicing during the Global Financial Crisis. “CW Capital engaged us on a couple malls as did C3 Capital Partners ,” Schneider says. “We were working for the special servicers, and it was a big and necessary business.”

It’s a line of business that could soon be back. 

“In many ways I hate to see it come back, but there is going to be a need,” Schneider says. “We previously demonstrated an ability to turnaround an asset from a servicer position to a profitable sale, benefitting the seller, purchaser and ultimately the consumer and community. It’s no secret that the U.S. is over-retailed, so we need to find alternative mixed-uses for the real estate which serves an unmet demand.”

Schneider anticipates some of the distressed properties hitting the market, particularly retail assets, which may need a change in uses. 

“Just as a retailer uses bankruptcy to financially reposition themselves, so too can real estate be repositioned,” Schneider says. “Special servicing is a vehicle that can lead to reimagining what commercial real estate can be in a positive way.“

Retail continues to have its challenges, and the coronavirus pandemic has just accelerated the need to address these issues.”

Before COVID, Schneider thinks retail landlords might have had three to five years to figure out how to reimagine their properties. But COVID changed things. 

“it’s coming much faster now,” Schneider says. “We’re going to see a lot of change with retail, but it’s ultimately going to be positive. A crisis is a terrible thing to waste when you can bring about positive improvements that are beneficial for the industry and the local community.”