So far, the apartment market has held up relatively well after COVID-19 hit. But Jake Reiter, president of Verde Capital, does see some issues on the horizon.
In higher-end, mixed-use apartments, the retail and hospitality portions could “pull-down” building performance, according to Reiter. “The hotel piece, the WeWork piece or the retail piece could be distressed.”
With some smaller apartments, the retail owner could also be the building owner. “It could be a travel agency [on the first floor],” Reiter says. “The owner of the building may also own the business. If that business is closed and there is not a huge amount of multifamily upstairs, the closing of the retail is not immaterial to the overall economics of the building,” Reiter says.
These are opportunities that Verde is monitoring. In this scenario, Verde is looking for ways to recapitalize the debt or leave the debt with the lender, according to Reiter.
“I believe there is an opportunity for us to work with certain landlords and their banks and say, ‘You’ve got a pretty significant piece of the building that’s not generating income,’” Reiter says. “We can provide rescue capital and or come in and buy the building. We’re providing fresh equity, and we believe that we can buy it at a better price point because we’re no longer buying it when its earning full income.”
Reiter says that Verde has the patience to find new tenants for the first-floor retail. “Eventually, we may turn that commercial into residential if the market doesn’t come back for that [retail] specific use or we’ll reopen the venue that was originally there and be patient with the owner,” Reiter says. “Or we’ll put it in another tenant post-COVID.”
There may even be an opportunity for a value-add play if the land is zoned for additional multifamily. “We can build some additional residential units,” Reiter says. “Maybe we can build an extra 50 or 100 apartments on top of what is there.”
Reiter says owners of some of these buildings have already reached out to Verde. “It’s a little early, meaning the stress hasn’t materialized to the point where we think it’s time to buy,” he says. “We think early next year banks are going to be less inclined to be deferring loans for three or six months.”
When banks stop deferring, opportunistic buyers will see some chances to accumulate assets. “At some point, they [banks] are going to want to get paid, and part of the building’s income [in retail] is no longer there,” Reiter says. “It doesn’t look like it’s going to open soon, and you’ve got a coverage default.”
While Reiter sees distressed first-floor retail as a way to collect more assets potentially, he doesn’t think there will be widespread distress in the apartment sector. “I don’t see multifamily as an asset class being damaged significantly,” Reiter says.