Frustrating Investors, Distress Still Lags

Capital has been amassing for distressed opportunities.

Preqin reports that capital raised for closed-end distressed fund strategies was 17% of total real estate fundraising in Q1. But the amount of capital looking for deals is even larger than that. Of the $363.8 billion allocated for real estate, over one-third is in opportunistic or distressed funds.

Some examples include Oaktree Capital Management, which recently raised $4.7 billion for its eighth opportunistic global real estate fund and Brookfield Asset Management, which is seeking to raise $17 billion for its largest-ever global opportunistic fund, according to JLL.

But right now, this money is still sitting on the sidelines.

JLL reports that there is no sign of the same level of distressed opportunities that arose after the 2008 financial crisis.

Real Capital Analytics says there are many distressed assets that could potentially hit the market, but banks haven’t forced the issue. Nick Ridgewell, funds advisor director at JLL, says lenders are currently extending loans.

“There’s been less urgency and more dialogue than we saw in the global financial crisis in 2008,” he says.

Right now, there is a gap in buyer and seller pricing expectations, and Ridgewell thinks it will be an issue for the time being.

Ridgewell says there needs to be price discovery before the market starts moving. “That will first need to be solved before we see significant market movement and can then truly label deals distressed, or discounted,” he says.

Meanwhile investors are pursuing a barbell approach, balancing core strategies with opportunistic or distressed strategies, according to JLL. “The aim is to capitalize on dislocations.”

Investors may be most likely to find dislocations in the retail and lodging space. Still, those loans are moving into foreclosure at a rate far short of the levels predicted when the pandemic gripped the country last March, with just 12 loans representing $270 million of outstanding balance officially beginning the process, according to Moody’s Analytics REIS.

But things could be changing soon.

Moody’s Thomas LaSalvia and David Salz note that CMBS servicer commentaries suggest there may be a “significant pipeline” of properties that may go through foreclosure. More than $6 billion worth of retail and lodging loans had servicer comments mentioning foreclosure, deed-in-lieu, or REO in May, according to Moody’s analysis, and of that number about $3.6 billion were retail loans and the another $2.4 billion were lodging loans.