Amid the coronavirus many property owners are struggling and in need of a capital infusion. Gregory Freedman, a co-founder of real estate investment firm BH3, thinks opportunistic debt funds could provide an answer.
“There are certainly opportunities to get capital out there, which is always necessary in a recession,” Freedman says. “That injection of capital is what gets people back to work and stabilizes the asset and the economy. If that hotel needs capital to hire back 400 people, a debt fund can provide that.”
So, far opportunistic debt has flowed into places where securities trade publicly, such as CMBS. “You’ve already seen a bunch of that capital coming off the sidelines,” Freedman says. “A lot of big-name firms have been buying up bonds. Those stock prices and bond prices had a substantial recovery after an initial dislocation.”
With hard assets, capital has moved slower. “It’s like turning a cruise ship,” Freedman says. “This crisis has come on very quickly. If you’re a landlord in any asset class, April 1st was your first month of collections during the crisis.”
If tenants don’t pay rent, Freedman predicts that in 60 and 180 days, opportunistic capital will move into hard assets. “The light switch just got turned off,” he says. “There’s zero cashflows. In fact, there’s negative cashflow on assets like hotels and retail where your tenants aren’t operating.”
The situation was different in the Great Recession. In 2008, borrowers still had cash, but they were fighting to hold onto their assets. “They would fight you for two, three or four years in foreclosure and bankruptcy to try and hold onto that asset because it was their lifeline,” Freedman says.
This time through, Freedman expects borrowers to try to work with lenders to get the latitude and the runway to hire people. “They need money for leasing commissions and improvement dollars for the next tenant, which is going to be at a lower rent,” Freedman says.
The good news is today, unlike in 2008 and 2009, lenders are in better shape, according to Freedman. And there is money out there that can be deployed.
“In 2008, the financial markets were broken, and there wasn’t liquidity,” Freedman says. “Today, banks are generally healthy. The financial markets are operating and functioning. There’s a lot of liquidity that can be redirected to opportunistic investing whether that’s for debt or buying up properties. That, by and large, is a good thing.”
Freedman argues that an infusion of debt capital into struggling businesses can do broader good.
“If people can go to work and pay for a place to live that flows upstream,” he says. “So, opportunistic capital in the marketplace is beneficial to a speedy recovery. If that capital wasn’t there, it would take a longer time to recover, and we’d be in a much darker situation over the next several years.”