Mortgage delinquency rates, which have been a bellwether of distress in the CRE sector during the pandemic, are continuing to improve. One area of concern, however, is that elevated levels of delinquencies in the lodging and retail sectors are expected to linger as troubled loans slowly work toward resolutions, with some defaults expected.
There are still a lot of “what ifs” that will influence how the amount of distress in CRE will play out. Some believe that distress has peaked and is gradually being worked out. Others think there could be more flare-ups of distress ahead in certain pockets, especially once forbearance and government stimulus disappear. The Delta COVID-19 variant is another wildcard that could significantly weigh on the economic recovery and stall returning momentum within property sectors, notably lodging and even offices.
Despite all of this, the massive wave of distress that some had predicted at the beginning of the pandemic has not materialized. Last December CoStar released data from its predictive modelling that projected 16 different scenarios for the volume of distressed asset sales that could potentially occur over the next five years based on different assumptions. Models ranged from a high of $659 billion to a low of $134 billion with a median topping out at about $321 billion. CoStar has since pulled back from those models, in large part because there are so many unique variables in the current market that are influencing the outcome of troubled loans.
“There are still a lot of uncertainties to monitor, but my new expectation is that the distressed loan volume will be dramatically reduced if we keep the recovery speed that we have right now,” says Xiaojing Li, managing director Risk Analytics at CoStar.
The government stimulus and forbearance have played a big role in curbing distress. In addition, properties across the board are generally carrying lower leverage debt and pre-pandemic underwriting on valuations was sound, which puts borrowers in a better position for recovery.
Limiting supply of distressed opportunities:
Lenders are being more prudent in how they are managing troubled loans, offering different solutions than the wholesale foreclosures that were prevalent in 2008-2010. In some cases, a borrower simply needs more time and continued recovery to move that loan back to performing. Another option is to bring in new equity and/or restructure the loan. A third route is for that troubled loan to be liquidated through a discounted payoff or foreclosure and REO or note sale. Stimulus programs along with lender forbearance and moratoriums on litigation have also given borrowers more time to resolve distressed situations.
Values have held up in large part from simple supply and demand fundamentals. The amount of capital raised for opportunistic investments far outweighs the volume of distressed assets that have emerged.
Increasing demand:
Abundant liquidity coupled with the prolonged low interest rate environment is also affording borrowers more options. There is a significant volume of capital earmarked for investment that is specifically targeting opportunistic investing through loan sales, distressed real estate sales, recapitalizations, etc. That, coupled with the low interest rate environment, limits the volume of distressed product. As such, we have a notable supply vs. demand imbalance. There’s too much money chasing too few distressed situations.
The deep discounts that many investors had hoped for on distressed REO and note sales have not materialized to a significant extent. Although there have been anecdotal examples of deeply discounted loan sales, the majority of values have held up fairly well.
If you’re an opportunistic investor in this competitive environment, and planning on leveraging your equity, you’ll be served well by staging your financing ahead of the opportunity.
If you’d like to stage financing ahead of your next opportunity, give us a call.
We work for you, not for the lender.
Today’s post is written by Michael Green, Commercial Loan Originator for Counsel Mortgage Group, LLC.
Counsel Mortgage Group®, LLC
www.counselmortgage.com
480-502-1000
NMLS #178927
AZ MB #0909580
CA DBO #60DBO43873
HI-178927
Copyright © 2021 Counsel Mortgage Group®, LLC.