Stimulus Should Support Property Values Until the Recovery Begins

Property owners facing pressure are focused on how to last another six to nine months.

Right now, there’s a lot of money on the sidelines waiting to scoop up distressed assets.

In a new research video, John Chang, SVP and director of research services from Marcus & Millichap, estimated that between $50 and $100 billion is waiting to acquire deeply discounted property.

However, Chang thinks a lot of these investors will end up being disappointed.

Banks are making an effort not to foreclose on assets, keeping distressed investors on the sidelines. “The Federal Reserve is encouraging banks to help owners make it through this cycle,” he says. “There will likely be some CMBS foreclosures, mostly hotel and outdated retail properties, but not the wave of prime assets hoped for by opportunistic investors. Other properties will come to market at a discount.”

Chang says there is also a lot more liquidity now than there was during the financial crisis. “Liquidity was squeezed and, as a result, it was very difficult for investors to access capital,” Chang says. “Currently even hard-hit hotels are able to access capital either through banks or private equity.”

With an end in sight to the pandemic, many CRE owners are trying to hold on until the recovery begins. Those owners who decide to sell either can’t afford to carry the asset, or will require significant capital to reposition it after the crisis, like outdated shopping malls, according to Chang.

“At this point, we can see the light at the end of the tunnel,” Chang says. “Once we hit a critical mass of vaccinations, perhaps in the third or fourth quarter, the economy will begin a comparatively strong recovery cycle. So property owners facing pressure are focused on how to last another six to nine months.”

The problems that did exist in CRE are mainly confined to two sectors—lodging and retail. The retail CMBS delinquency rate is 11.9%, up from 7.8% in the financial crisis. Hotels are facing a 60-plus day delinquency rate of 20%, an increase from 16.7% during the financial crisis. Citing RCA data, Chang says retail prices are down 6.7%, and hotel values are down 6.8%.

“In these two sectors, there are significant differences by property subtype,” Chang says. “So for investors waiting on the sidelines for a wave of distress, there will be some opportunities, but the competition for those assets will be fierce.”

By contrast, the other sectors have held up well. For industrial, the current delinquency rate is 1.3%. It reached 12.6% during the financial crisis. For apartments, the delinquency is 2.5% after it was 15.9% during the financial crisis. Office delinquency is 2.8% compared to 10.4% in the last cycle.

Pricing has also been resilient in these sectors. Again citing RCA data, Chang says apartment property values are up 5.9%, office is up 5.9% and industrial is up 5.4%.

“There are a lot of differences compared to the last recession and how delinquencies will play out for us,” Chang says. “There is an enormous amount of stimulus money supporting the economy this time. And a lot of it is specifically targeting hard-hit sectors like hotels, tourism and entertainment.”

With that money being injected into the economy, the duration of the recessions will probably be much different this time as well. “The last recession effectively, if not officially, lasted years and was followed by a very slow recovery,” Chang says. “This cycle looks like you will have a clear ending, and economists are forecasting 2021. Economic growth will be the strongest since 1984.”