Looking at the sectors that have been impacted, retail and hotel property owners have suffered the most, followed by office and multi-family property owners. PPP loans issued in response to the hardship have been helpful to some but may not be enough to keep some property owners from defaulting on loans. Fortunately, there are reasons to believe that the outcome of the pandemic will not have a catastrophic impact equal to the Great Recession.
At the beginning of the financial crisis in 2008, distressed sales made up ±1% of commercial real estate transactions (Q1 2008). That number increased to 20% by Q4 2010, according to Real Capital Analytics. U.S.-based financial institutions experienced a deficiency of $110 billion on commercial real estate in the last financial crisis, comprising one-quarter of their total losses, according to Oxford Economics. Post-recession, U.S. regulatory changes (such as CMBS 2.0 and other revised guidance) were enacted to protect banks from future fallouts. Many banks have shielded themselves from disaster by varying their investments and decreasing the amount of liquidity they place in real estate. As of Q3 2020, outstanding and potential distress totaled around $130 billion, according to Real Capital Analytics.
The differences in which real estate sector is being impacted are key to understanding the risks that this financial downturn poses. While the Great Recession in 2008-2010 mainly impacted the single-family residential market, the pandemic and its resulting shutdown and restrictions have primarily targeted commercial properties in the office, retail, and multi-family sectors.
The release of vaccines offer hope to end the crisis, but property owners and financial institutions only have conjectures on which to base their plans. Real Capital Analytics speculates that property owners and financial institutions alike will lean in favor of believing the crisis’ conclusion is in the near future, leading them to paper over problems.
While the market is signaling increased potential for defaults and the need for loan workouts in 2021, the forecast is somewhat mixed. Many feel only time will tell an accurate depiction of how commercial real estate will be impacted by the unforeseen challenges of the current pandemic. This statement may be true, however, experience in the space coupled with research and investigation may yield previews of what may come. While financial institutions acted in past years to safeguard the U.S. economy, the past decade of record low interest rates, and the almost year-long continued change in consumer behavior (i.e., working from home, online schooling, online shopping, limited restaurant traffic), could build to peak financial risks of an economic fallout. As the Great Recession included a crisis of liquidity, the current environment has seen greater ease in continued funding for projects in process stemming the tide of non-completed projects entering the market.
Bradley Company’s asset resolutions team employs a comprehensive single-stop service to assist clients in developing timely and efficient solutions for all parties. From initial consultation and analysis to lease-up and/or disposition, Bradley Company is equipped to provide unparalleled oversight and protection for the assets from start to finish, physically, financially, and legally. For more information, contact Jon Hardy (jmhardy@bradleyco.com) or Mitch Doner (mdoner@bradleyco.com).
