Where is distress manifesting in
commercial real estate performance metrics?
How is the COVID-19 crisis unfolding, in terms of which
property types appear to be holding steady,
indicating potential strength and possible opportunity?
And which ones appear to be hit harder?
With economic reopening efforts underway,
how might these dynamics change?
Lets take a look at the most transparent,
most frequently updated slice of the CRE debt market -
commercial mortgage backed securities, or CMBS.
We collaborated with Jim Shevlin and Daniel Warcholak of CWCapital,
a major player in special servicing,
to study what they were seeing in the front lines.
First - the majority of relief requests,
coming from properties that were unable to service their
loan obligations, came from the hotel and retail sectors -
but 84% of relief requests, according to CWCapitals experience.
This really comes as no suprise given how hard hit travel
and brick and mortar retail were by economic shutdowns.
This is also roughly consistent with another view
of indicative measures of future distress.
When servicer comments actually mention "COVID-19",
its one variable in our structured finance group tracks very closely.
Note, that not all of these loans are delinquent,
but as an approach towards an early warning signal,
it is certainly one of the variables that we track,
given where we are in the business cycle.
Where then are the pockets of opportunity and relative strength?
First, there is very little distress we are seeing in
multifamily and industrial properties.
There now, this might be due to the fact that multifamily
renters are also receiving some form of government support,
so the dury is still out as to whether
this might change for the worst,
once programs like the PPP wind down.
Second - distressed debt funds might actually take a look
at distress manifesting in hotel and retail and see,
wow, there are opportunities there,
but is now the time to invest?
Hotel will likely recover once travel recovers,
but when will that be?
And, are you the one that is going to make a case
for investing in a mall at this point in the business cycle?
As world economies reopen, even as COVID-19 remains
an ever present threat,
we will continue to monitor and track these issues.