Real Estate Companies Are in the Greatest Danger of Being 'Zombies'

A Kearney 2021 report on so-called zombies has caught renewed interest as it became clear that, globally, real estate companies were in the biggest danger of joining the cast of The Walking Dead.

The report looked at 20 years of data on global companies that were at least 10 years old and where earnings before interest, taxes, depreciation, and amortization, or EBITDA, were less than interest payments for three years in a row. From 4 million records covering roughly 67,000 companies across 152 countries and 154 industries, the Kearney authors calculated that 4.5% of listed firms overall were zombies. But when it came to the real estate industry, the percentage jumped to 7.4%.

“From 2019 to 2020 it grew by 18%, which is quite substantial,” Nils Kuhlwein, partner and managing director in A.T. Kearney’s German division, tells GlobeSt.com. “It is highest with diversified real estate companies—it’s above 10%.”

The total number of zombie companies was 1,772. Of those, 130 were real estate companies. There was no available geographic split-out, so it’s currently unknown how many of the 130 are in the U.S. However, as the report notes, “the United States has the highest percentage of zombies in this international comparison” at 6.4%.

The danger for zombies in general is the likelihood of rising interest rates. Kearney undertook a dual scenario analysis where interest rates, which are still roughly at historical lows, increased by half or doubled. “When we did the scenario analysis, we saw globally that the number of zombies would grow by 20% in the first scenario and 40% in the second,” Kuhlwein says.

For real estate, the results would be worse. Real estate diversified activities under the first scenario would see a 15.0% rate of zombies, compared to development (9.3%), operations and services (8.8%), service (2.4%), and overall (9.8%). If interest rates doubled to 3%, which would still be historically how, the percentages of zombie companies were largely significantly higher, with diversified at 16.9%, development at 10.7%, operations and services at 10.7%, service at 2.4%, and overall, 11.4%.

“If the bounce-back after covid continues strong, we can grow out of these risks,” Kuhlwein says. “But if the supply chain crisis hits stronger, maybe the signals on risk of asset valuation and performance of those companies could be a tipping point. I think it’s speculative which direction we’re going now. I think there’s a lot of uncertainty in the market [because of ] inflation, interest rates going up, and a lot of money seeking investments.”

Investors might take the report as a red flag and examine the financials of the companies where they have invested, especially if there is the chance that property values could fall.