Dry Powder Will Bid Up Distressed Properties. Here’s Where Else to Invest.

While there are many predictions about waves of distress hitting the commercial real estate market, John Chang, senior vice president, director of research services at Marcus & Millichap, thinks there will be few truly distressed assets reaching the market.

Instead, Chang says the significant amount of capital targeting real estate will bid up most underperforming properties.

“Investors should not expect to buy CRE for pennies on the dollar,” Chang said on a recent video from Marcus & Millichap.

Chang said that some properties, such as enclosed shopping centers or big box hotels that cater to major events and conferences, may sell at a discount. “But these are typically not the target of private investors,” he says.

Chang says that sales activity has rebounded strongly since the Q2 trough. “Although it’s not back to normal yet, the outlook for 2021 remains positive,” he says. “In addition, the low-interest rate environment and strengthening availability of debt capital are fueling sales as levered yields are currently exceptionally strong.”

With distressed assets not a likelihood for most investors, Chang offered his take on where the opportunities will be. It is a good time to buy in almost every sector except industrial, he said. For industrial, caution is advised, and it might even be a good time to sell with prices elevated in some areas of the country.

For self-storage, the outlook is cautiously optimistic. But Chang cited one investor who warned not to jump in without doing the appropriate amount of homework and engaging professional management.

The hard-hit retail sector is more nuanced. “There is considerable variance by retail property subtype,” Chang said. “So depending on the type of retail property and the health of the local market, now could be a good time to acquire properties.”

The pandemic has hit hospitality the hardest, but the outlook is a lot better today than it was a month ago—before the vaccines were announced.

“It looks like there will be less uncertainty as we go forward,” Chang said. “Its unlikely prices will fall as uncertainty abates. They will likely only go up.”

Even though the situation is solidifying with the arrival of vaccines, investors shouldn’t plan on a quick turn, he also said. “If they look forward three years, five years or seven and 10 years—the average real estate hold time—then the value becomes apparent,” Chang says.

Having a long-term horizon can pay off.

“Looking at the underlying demand drivers for an asset on a long-term basis is key,” Chang says. “There are many opportunities out there today that have a sound long-term outlook.”

“