It has taken years to mop up the flood of distressed assets and troubled commercial real estate loans that hit the market in the wake of the recession. Although the clean-up is by no means complete, it is definitely moving closer to that end goal.
“Based on raw data, clearly a lot of the troubled assets have been cleared up and resolved,” says Steven Schultz, executive managing director with the loan sale advisory group at NGKF Capital Markets in New York City. Nearly two-thirds of the $412 billion in commercial real estate loan defaults have been resolved, while $140 billion remained outstanding at the beginning of the year, according to Real Capital Analytics (RCA), a New York City-based research firm. In fact, the research firm has stopped publishing distress statistics in its market reports as distressed asset sales approach the end of the cycle.
The diminishing supply of non-performing loans is fueling competition for the few remaining deals among a crowded field of opportunistic investors.
“Without a doubt, competition in this arena is fierce nationwide,” says Robert Occhiogrossi, a director with IVI International Inc., a national commercial real estate risk management firm based in White Plains, N.Y. “Cash transactions, foreign investments and creative funding solutions for those that need acquisition financing are all fueling the fire more.”
Decisions to place capital are being made in less and less time, in order not to lose out on desirable opportunities, he adds.
“The buy-side appetite is at its highest peak that I have seen since the downturn of this market,” says Schultz. Some groups have raised billions of dollars to buy troubled loans and distressed assets, and there is pressure to place that capital, he adds.
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Bidding frenzy
For example, NGKF Capital Markets recently marketed two sizable distressed asset portfolios totaling approximately $100 million in New York, New Jersey and Pennsylvania. Between the two deals, NGKF received more than 150 confidentiality agreements from interested investors and more than 20 bids per deal. The bidding investors ranged from very large funds to individual value-add buyers.
In the CMBS sector, the big story this year has been two large block sales of distressed assets by CW Capital Asset Management. The special servicer put a portfolio of real estate and non-performing commercial mortgage loans on the market last fall with an unpaid principal balance of $3.43 billion. “While the loans themselves took losses, the outcome was better than expected,” says Joe McBride, a research analyst with Trepp in New York City.
According to CW Capital, the block of assets that were marketed through CBRE Inc. received more than 730 signed confidentiality agreements and attracted 153 bidding entities and more than 930 bids on 63 assets. The second block of assets marketed through Auction.com received more than 5,000 signed confidentiality agreements from interested buyers, which resulted in approximately 244 bidding entities and more than 1,130 bids on 71 assets.
That demand has helped lenders capture more favorable pricing. Many of the loans sold for higher than expected prices. So while the loans themselves took losses, the outcome was better than expected, notes McBride.
“I think there is a lot of capital available and in this low interest rate environment it is searching for ways to get better than 0.5 percent yield. So, there is definitely good demand,” he says.
Although the supply of distressed assets has diminished, the remaining $140 billion still represents a sizable chunk of potential buying opportunities.
“We continue to feel that this year will have a good flood of product, maybe not as much as in the past, but there are still plenty of good opportunities,” says Schultz. The firm’s loan sale advisory group assisted with more than $500 million of distressed asset transactions during the first quarter. Regional community banks have been active in moving troubled assets off their balance sheets, and CMBS servicers are also still working to sell some large portfolios of troubled assets.
In addition, there are still some emerging distress situations. One potential source is a looming batch of CMBs maturities—10-year loans made at the peak of the market in 2006 and 2007. There is an estimated $111 billion in CMBS loans maturing in both 2016 and 2017, according to Trepp.
“Based on the number of requests we receive that focus on opportunistic redevelopment or value-add propositions, there are still a good number of properties nationwide requiring attention,” says Occhiogrossi.
This article was republished with permission from National Real Estate Investor.
