Any Signs Of A Distressed Market Yet?
Moody’s analysis shows subtle discounts for retail and hotel but limited evidence of stress for all other sectors.
While the outlook for the economy is brighter, there has still been a lot of pain across commercial real estate. Retail and lodging have suffered tremendously through the pandemic, while there are questions about the forbearance activity in multifamily.
Some of these retail and lodging properties will need to be converted to other uses. But for that to happen, investors will have to buy them at a discount. To determine value, transactions need to happen.
The good news is that things began to perk up late in 2020.
In the fourth quarter, transaction count and volume for all property types increased as much as 50% from Q3, according to Moody’s Analytics. For multifamily and industrial, the levels were on par with Q4 2019.
Moody’s analysis shows subtle discounts for retail and hotel but limited evidence of stress for all other sectors. In multifamily and industrial, cap rates fell and price per unit increased a bit.
After evaluating remittances, Moody’s says there is little evidence of recoveries or discounted sales. It looked at loans with a 121-plus day delinquency status in January to determine how many have exited that status.
In the retail and lodging sectors, Moody’s found that the latest remittances show approximately 19% of the 121-plus days delinquent loans exiting that status last month. About 5% of those loans are marked as current and paid through February. Another 37% appear to be making a payment to catch up but are still behind. Another 58% appear to be in forbearance or under a modification. There were less than a handful of loans going into foreclosure or REO. Additionally, Moody’s says the number of 121-plus days delinquent loans is stable as loans migrated into it from the 90 to 120-day delinquent status.
“At this point, we cannot contribute to the banter either way, other than to say we are not seeing strong signs of a distressed transaction market,” write Moody’s David Salz and Thomas LaSalvia. “As this health crisis came upon us with unbridled force, we may experience a buoyant recovery. We will keep watching.”
While there might not be clear signs of distress, groups are lining up to buy troubled assets.
Last week, as one example, Electra America, a platform specializing in the multifamily and residential sectors, and AKA, a leader in luxury hotel residences, partnered to form Electra America Hospitality Group. The fund is in the process of raising $500 million in capital from investors for the acquisition of distressed hotels in major gateway markets.
“Our business plan assumes that a large number of the hotels that we buy will be closed. Our plan is to take advantage of downtime in the operating cycle to renovate,” CEO Russ Urban told GlobeSt.com.