Next economic crisis: vacant retail space

It is also feared that Donald Trump has made his fortune in commercial real estate, being frustrated by a lobbying problem with the industry, as significant relief for the industry will be seen as “handing over the president’s friends” .

“Sometimes people forget the depth and breadth of commercial real estate,” said Mike Flood, senior vice president of commercial and multilateral policy at the Mortgage Bankers Association. “What is the risk here is the ability for both people to live in their apartments and people to go to their jobs. So until there is no excitement, there is little to go back to until we return to normal time. “

A major problem is not how long commercial real estate will decline. Business travel is not expected to be withdrawn for at least one year, so the hotel is being closed. And while the downturn in office buildings is yet to be felt – offices have long leases – which will change the way many companies work the way they work, becoming the norm.

The number of commercial loans packaged in securities known as “special services” – where distressed debts are transferred to a new manager hired by bondholders to negotiate a payment plan on their behalf – has steadily increased since March. is.

And it has become clear that the virus will continue to cut revenue for some time, so even those property owners who have been able to pay together – for part of the relief measures passed by Congress Thanks – may start to slip.

The loss of paying tenants can touch a wave of property write-downs and ultimately foreclosures on everything from shopping centers to apartment buildings. But this is not just the pocket of rich investors, who will be hurt by the widespread writing. Eighty-seven percent of public pension funds and 73 percent of private pension funds hold real estate investments.

Borrowers seeking debt relief or considering refinancing are also running into trouble, as the uncertainty caused by the virus has not left them with a clear projection of future revenue streams for their buildings.

“Every lender is trying to help regardless of the form of finance, but sooner or later the borrower needs customers,” Flood said.

The damage is already visible in the securities market, where the mortgage is packaged into bonds sold to investors, which are then repaid by payment on the mortgage.

One of 5 loans tied into commercial mortgage-backed securities is on a special servicing watchlist, where loan officers – companies that collect mortgage payments and forward them to investors – demolish potential barriers to future payments, Such as a major tenant.

Because the crisis has hit some places and industries much harder than others, it is difficult to get a clear, big picture of market troubles – a reason lobbyists have struggled to tell policymakers immediately. Some assets have been wiped out, while others are endowed.

Hotels and retail, which together make up 40 percent of the commercial mortgage-backed securities market, have been hit hardest. A few months after the lockdown, 1 out of every 2 hotel rooms is empty. Urban hotels, which have some of the largest operating costs, are the worst with only a 38 percent occupancy rate.

And retail, already struggling before Kovid, saw its decline accelerate thanks to the rise of e-commerce. It’s not just small strip malls, either: The owner of the US $ 1.9 billion mall entered into an agreement with his special serviceman in August to avoid foreclosure.

A quarter of all CMBS hotel loans are in special servicing today, compared to just 1.9 percent at the end of 2019. And 18.3 percent of retail loans are in special servicing, up from 5 percent at the end of last year.

On the other hand, apartment buildings have performed well so far. Industry analysts are eagerly watching for signs of additional tenants’ rents that are now sparking an initial surge of economic relief included in the $ 2 trillion Cars Act Congress passed in March.

Owners of apartment property have also been harassed by a nationwide ban on eviction for non-payment of rent imposed by the Center for Disease Control and Prevention last month. The order did not include any funding for rental assistance – effectively requiring landlords to subsidize the housing of struggling tenants until it expires on 31 December.

Flood said, “The worst case scenario is that you take flashing assets in all commercial real estate and potentially create a liquidity crisis, and quite frankly, a situation where people are put on the street, “Said Flood. The eviction ban, he said, “transfers risk to the borrower and lender.”

Property owners are trying to get relief on their debts, meanwhile, especially in cases where the debt is already packed into security.

Lisa Pendergast, executive director of the Commercial Real Estate Finance Council, a trade association representing investors and commercial executives, said, “The difficulty here is that both the borrower and lender need to determine the value of the property. What is it.” Mortgage.

“Where do you think the value of your property is going to be in three months, six months, six years?” Pendragast said. “depends on.”

Part of the problem has not been enough commercial property transactions – sales were down 68 percent in the second quarter from the previous year – leaving buyers and sellers with wildly different ideas to find out how much the property values ​​have actually fallen. Giving is the value of property.

Lack of clarity on the current value of the asset is particularly important for loans held and tied to securities held by investors. A bank can give short-term relief to the borrower in a few months and reintroduce the issue, while a borrower whose loan is packaged in a security can get more investor approval to adjust the payments. Has to go through a complex process.

Special officers have to model future payments for bondholders, a difficult task when it is unclear what a building is right now or whether it will soon bring in revenue.

“This whole thing is crumbling – not knowing the value of an asset,” said Michael Bright, CEO of the Structured Finance Association, a business group representing 370 companies involved in securitization. “This is a very important input and nobody knows.”

A May survey by the American Hotel and Lodging Association found that only 15 percent of borrowers whose loans were packaged and sold to investors were relieved on their loans, while 80 percent of borrowers had bank-owned loans Were.

Consider the owner of a hotel whose business was going well before Kovid arrived. If the owner has a loan with a bank, he can say that the six-month payment deferral scheme or the bank has a long-term loan, unless there is a vaccine.

But if the debt has been sold to investors in the securities market, the owner is on the hook for the full monthly payment, which the authorities forward to the investors. He may work on a server avoiding payment, but according to investors, depending on how much risk they may incur.

In the long term, the source of funding does not matter much – after all, a bank must write off an asset that does not recover. And industry analysts are not sure what qualities will happen.

“The main question is likely to be around structural economic changes or changes in shopping and living behavior,” Bright said.

“I think everyone is trying to understand what the world after Kovid means to commercial real estate,” he said. “Hopefully, people want to travel and gather together again soon, but we don’t know yet.”