The Few Distressed Sales Involve Hotels

So, far pandemic-retail income problems haven’t led to distressed sales in many commercial sectors.

Hotels have been the one exception to that trend, though. Eight percent of hotel sales involved a distressed asset between March of 2020 and February of 2021, according to Real Capital Analytics. This percentage takes on greater significance as there were very few hotel transactions in that timeframe, with only $10.6 billion traded, RCA says. By comparison, $36.6 billion traded in the prior 12-month period.

One recent example: Monarch Alternative Capital LP is purchasing the 400-room Crowne Plaza Orlando Universal Boulevard hotel in Orlando, Fla., through a Section 363 sales process as part of a Chapter 11 restructuring. The full-service, upscale hotel first opened in 2002 and generated consistent class flow, prior to the pandemic.

And one of the largest distressed portfolios hitting the market involves hotels. Last month Singapore-listed Eagle Hospitality Trust announced  a stalking-horse auction that will be held on May 20th for 15 US assets. The price floor is $470 million. 

Scant Sales in Other Sectors 

In other sectors, the distressed sales have been scant. In industrial and apartments, only 1% of sales in each sector “was tied to an asset purchased out of distress,” according to RCA. The two sectors together represented 60% of deal volume across the five core asset classes since the pandemic began.

Distressed sales in office and retail have risen but still haven’t come close to the levels seen in the Global Financial Crisis, according to RCA. Distressed office assets only constituted 1.3% of office deals over the last 12 months. In 2011 distressed office sales were 16.0% of the sector’s transaction activity. In retail, distressed accounted for 2.4% of activity. During the GFC, they were 12.8% of sales.

Wave of Capital 

The relative lack of distress assets is meeting up with a wave of money that has been amassed for such purposes and whether these funds can deploy their capital entirely is becoming increasingly unclear. 

In March, American Ventures Partners launched the American Ventures Strategic Property Fund to invest in distressed US commercial real estate. The fund, which has a target capital raise of $1 billion, will focus on properties valued at more than $50 million and priced below replacement cost.

It is confident in its go-to-market strategy, according to prepared remarks by American Ventures chairman Philip Blumberg. He notes that Class A office properties are available at steep discounts. “Geographically, our best opportunities will be found in states with comparatively low costs of living and taxes, such as Texas and Florida, markets where we have strong experience,” he said.