Troubled Loan Workouts On The Rise in Q1 But There's a Catch
Many lenders are still delaying hard decisions.
The US CRE markets may be turning the corner on distress, though the specter of many potentially distressed loans looms large.
A recent analysis of the pace of CRE workouts by Real Capital Analytics showed that more US commercial real estate distress was worked out than arose in Q1—typically a good sign of impending transition in the market. But the firm cautions that the pace of workouts will be crucial in the coming months, especially since deal volume has contracted since the onset of the COVID-19 pandemic and potential buyers have shown disagreement over asset pricing.
“To the extent that there are more loan workouts, information from these negotiations will adjust buyer and seller expectations on prices that can be achieved,” RCA’s Jim Costello noted in a recent report analyzing 2021 data to date. “The process of price discovery may well work out more in the favor of current owners if the headline figures are correct and we turned the corner in Q1 2021. As fewer distressed loans come to light, there may be few significant discounts on offer. In such a case, buyers would need to step up to seller expectations on prices if they want to place money in the sector.”
Costello warns that the amount of potential distress on the horizon is “sizeable,” however, and primarily are loans in forbearance “or in other sticky situations that could lead to a distressed situation down the road,” he said.
While final Q1 numbers are still up in the air, RCA estimates the stock of potentially distressed loans could equal one quarter’s worth of CRE sales activity in the 2016 – 2019 period. If that distress is realized, volume would start correcting as sellers cut price expectations, Costello writes.
“The challenge with so much of the potential distress is that all participants are taking a wait-and-see attitude,” Costello noted. “Lenders do not want to foreclose on properties since that approach generally guarantees a loss of some sort. With vaccines going into arms and some sort of normality approaching, delaying hard decisions still looks like a good idea to many lenders.”