The Tide Ebbs, Then Flows In Again

By Paul Bubny

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A report last week from Delta Associates, which you read about first here on GlobeSt.com, charted the continued ebbing of the tide of distress in the US: the tally is down about $25 billion from its October 2010 peak of $191.5 billion. “We think the decline in distress has begun and will continue in a meaningful way in 2012 and beyond if interest rates continue to cooperate and economic expansion picks up pace,” according to the report, written by Delta president Greg Leisch.

Elsewhere on GlobeSt, one of the most widely-read articles as this week began was an excerpt from a Real Estate Forum cover story that featured Brian Watkins, director of Clarion Partners. He predicted more distress opportunities in the next few years for equity players as $1.2 trillion in commercial real estate debt matures.

“It opens up an opportunity for other types of capital,” Watkins said during the recent Transwestern/Real Estate Forum Capital Markets Symposium. “Potential opportunities will include asset recapitalizations and mezzanine financings as well as preferred equity plays.”

Distress is declining. There will be plenty of opportunities ahead in distress. Which is correct?

Both, of course. Delta’s report accurately describes the cumulative impact of extend-and-pretend and other methods of dealing with troubled assets, and the gradual uptick in commercial real estate prices, which Green Street Advisors predicts will increase 6% over the next six months. Current data from Real Capital Analytics show that the dollar volume of restructured loans and resolved distress situations in the US slightly outweighs that of properties that are either troubled or in lender REO.

Yet in conversation with GlobeSt.com’s Erika Morphy, Leisch points out that the real test is still ahead as billions in CRE debt come due each year. Couple that with other factors that RCA’s Troubled Assets Radar cites as potential hazards—ranging from slow lease-up to financially beleaguered owners—and you have the makings of much more agitation, if not outright loan delinquency, over the next couple of years.

Therein lies the opportunity that Watkins sees. He does not stipulate, however, that this opportunity will play out in the way everyone had expected when the current wave (or potential wave?) of distress began rolling in: scores of foreclosed assets selling at fire-sale prices, as we saw 20 years ago. Instead, the game calls for a new playbook.

Not incidentally, I’m responsible for the page on GlobeSt that chronicles the development of this evolving strategy. Distressed Asset Investments, which you can find here, continues and expands upon the mission of Distressed Assets Investor, the award-winning e-newsletter we published from 2009 to the end of 2011. Given that the word “distressed” continues to be part of the title, the new page’s coverage still chronicles the delinquencies, restructurings and, at times, foreclosures that go with the territory—including those that are reported in daily news stories elsewhere on GlobeSt. But there’s a great deal more.  

We’ve broadened the scope to encompass opportunistic investment—which some of the key players in the RTC era are now emphasizing over distress—and the all-important topic of asset management. It’s one thing to acquire an asset, and quite another to bring it up to a level of marketability that fits in with your plans, whether those plans include long-term hold or selling it off when the time is right.

(To search across all ALM blogs, go to www.Lexis.com.)