A CRE Expert On The Future Of Distressed Assets In A Post-Pandemic World
Stock market crashes, the subprime mortgage crisis, the 2008 recession — the real estate industry has weathered a lot of storms, and this past year has been no exception. Unlike crises of the past, however, the coronavirus pandemic has been a unique experience, one driven not by an unstable market or human error, but a global health crisis.
One of the key differences between this crisis and other financially challenging times is the role distressed assets will play in the market’s recovery.
33 Realty and Cubed Construction principal Eric Weber said that leading up to the subprime mortgage crisis of 2008, there were inherent weaknesses in our financial system that were largely brought on by banks. This fueled an explosive growth of mortgage lending to subprime borrowers through financially engineered securitizations.
With such inflated real estate values and less aggressive government support, property values plummeted. Lenders were in a state of shock and reacted instinctively by taking back their properties to protect their collateral.
“Those lenders were not in a position to keep those assets on their balance sheets so we saw a flood of distressed assets hit the market,” Weber said. “Conversely, this time around our financial systems were in check leading up to the pandemic and the real estate market was on fundamentally strong footing. Lenders learned from the past and were financing properties at realistic loan-to-value ratios while vacancies were at near-record lows across all sectors."
Weber believes that the distressed asset market will look very different in the wake of the pandemic than it has in times past and that the real estate market could be poised to come out of this stronger than ever. Bisnow sat down with him to get his insight into how the real estate industry handled this latest crisis, the future of the distressed asset market and where investors will turn.
Bisnow: What do you think the long-term impacts of the pandemic will be for real estate?
Weber: It really depends on the asset class. Retail was struggling coming into the pandemic, and the e-commerce boom that came as a result of the lockdowns is only going to make it more difficult for brick-and-mortar stores to recover.
Hospitality is another asset class that was hit hard and is quite a bit away from a full recovery. That said, the rollout of the vaccine combined with the pent-up demand for travel and leisure is likely to help this asset class bounce back. In fact, we’re already seeing improvement. Occupancy dropped to approximately 20% when the pandemic hit and is now trending above 50%. While it’s still lagging compared to pre-pandemic numbers, it’s pretty encouraging to see such a dramatic improvement in just over a year.
As for office, I think the pandemic has opened our eyes to remote work arrangements that are likely here to stay. That will inevitably cause some level of permanent change for office assets. To compete in this new environment, owners of office buildings are likely going to have to invest in their assets to accommodate distancing, ventilation, family-friendly amenities and other tenant demands imposed by the pandemic.
Bisnow: What factors helped keep CRE stable during this past year?
Weber: I think it helped that it was never actually unstable. People reacted dramatically to circumstances none of us have seen in our lifetimes and that drove perception that the CRE markets would crater, but they didn’t.
Leading up to the pandemic, our financial system was in check and the real estate market was on fundamentally strong footing. There were no underlying bubbles like the dramatically overpriced technology shares that led to the dot-com bust or the securitization of subprime mortgages that artificially inflated real estate values in 2008.
Bisnow: Do you think a flood of distressed assets will hit the market?
Weber: I really don’t. CRE is coming back with a vengeance and the industrial and multifamily markets are as strong as they’ve ever been, maybe even stronger than they were pre-pandemic. The retail and office markets that are struggling were already facing challenges prior to the pandemic, and distressed assets in those classes have been hitting the market consistently, but I don’t expect an upswing or anything that could be considered a “flood.”
When the pandemic hit, the government reacted swiftly — pumping trillions of dollars in financial relief into the system and slashing the federal funds rate to near zero to maintain liquidity in the markets. As a result, lenders were given the opportunity to negotiate with borrowers by way of loan modifications and forbearance agreements. In doing so, lenders have not had to take back properties thereby minimizing the number of distressed assets hitting the market.
Bisnow: As we come out of the pandemic, how do you think real estate investors are going to react?
Weber: Demand for real estate began recovering in Q3 2020 and that demand has increased exponentially. There are a variety of sources suggesting there is over $250B in U.S.-based real estate funds just waiting to be deployed. Institutional investors, where much of the money sits, don’t have the luxury of sitting on the sidelines. They are obligated to deploy their capital. We’re already seeing bidding wars across assets classes and I think that’s only going to continue.
Focus has now shifted to what will happen with tax legislation and interest rates. Dramatic changes to either, which seems somewhat inevitable, will have a significant impact on real estate values. I almost think the pandemic has become an afterthought for real estate investors.
This article was produced in collaboration between 33 Realty and Studio B. Bisnow news staff was not involved in the production of this content.
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