Photo byShutterstock.

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Late in 2018, Daniel Lebensohn, co-founder at BH3, started adebt opportunity fund to purchase non-performing loans. "We arespecifically targeting non-performing loans from banks and what wecall tourist lenders or folks that have come into the space thatare bridge lenders," Lebensohn says. "They took over a huge chunkof the business that conventional lenders shied away from due tothe new regulations that emerged after the recession."

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These capital providers are handling more sensitize, higher-risktransactions. That makes it more likely that their loans will runinto problems, according to Lebensohn. "That's not to say somebanks heavily into construction lending won't have their share ofdistress," he says. "But a lot of these tourist lenders pivotedfrom equity to debt. Everyone and their grandmother is in thelending space today."

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BH3, which bought non-performing loans from banks and recapturedassets in the last recession, is not seeing much distress yet.

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"If it was a faucet, it's not quite a drip or a trickle yet, butsome of them are chunkier loans," Lebensohn says. "We recentlypurchased a loan on a Manhattan high rise in July."

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That condominium deal, 125 Greenwich Street, consisted of 273condominium units and 320,000 square feet. "Not all of them [thoseloans] are that chunky, but there is more coming," Lebensohnsays.

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While Lebensohn doesn't think there will be the same distressedbuying opportunities as there were during the recession, he thinksthe cycle is over. "Money is still very cheap, so it's still verycompelling to invest in hard assets," he says. "If someone needs toget money out, there will be a lot of appetite to buy. But it's notthe same market that it was a couple of years ago."

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Lebensohn sees problems in condos, particularly projectsdeveloped later in the cycle. "In the higher end, where units areselling for $4 million and up, you will see distress," he says."Then you'll see it in multifamily where people projected muchricher rents than they're getting."

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Multifamily could get hit especially hard in areas with rentcontrol laws, which could lead to more problem loans. "One areawhere you will see it [distress] is in New York Cityrent-stabilized housing," Lebensohn says. "You have a million unitsacross New York City that have virtually been shut down. There islittle to no room for rental increases through the newlegislation."

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There will also be a limited opportunity for capitalimprovements.

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"Anyone who over-levered those product types, which arepredominantly pre-war, walk up over the five boroughs of New YorkCity, will be in some pain," Lebensohn says. "Taxes are going upand utilities are going up, but rents are not going up. I think thelegislature got it completely wrong, and the housing will suffer asa result. A lot of capital won't be going into thosebuildings."

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Leslie Shaver

Les Shaver has been covering commercial and residential real estate for almost 20 years. His work has appeared in Multifamily Executive, Builder, units, Arlington Magazine in addition to GlobeSt.com and Real Estate Forum.