The Distressed Debt Wave: 5 CRE Experts Discuss Trading Nonperforming Loans in 2021 and Beyond

|BY levercp

By Keren Goshen

Feb 4, 2021


We entered January 2020 with unprecedented momentum. A strong economic outlook called for a year of tremendous growth after nearly a decade of global economic expansion. While all the indicators of growth and success presented themselves, the global pandemic put the era of growth to a screeching halt; leading to a year of tremendous loss and uncertainty, changing the world as we know it.

A year later, with the vaccine rollout in full swing and the end to election uncertainty, we anticipate 2021 will be a strong year for the capital gains market. We are seeing a positive market outlook that boasts low interest rates, banks and investors flush with cash, and an S&P 500 index that’s up 3.8% YTD.

While we anticipate a strong year of recovery, we gathered the latest research and interviewed the most influential CRE experts to expand on our predictions. Here is what they have to say.

Distressed commercial real estate loans and discounted asset sales will continue to rise 

The Fool reports 20 large real estate firms have filed for bankruptcy by the end of 2020, including two with more than $50 million in assets. In the next five years, CoStar Group predicts there will be a more than $126 billion flash sale of distressed commercial real estate, equating to $321 billion in sales by 2025.

Additionally, data from the Federal Reserve shows commercial property debt increased to a record of $3.06 trillion for the first time during the third quarter of last year, up from $2.2 trillion in the third quarter of 2012, which was a 10-year low.

Brock Cannon, Head of National Loan Sales at Newmark believes the distress created as a result of COVID will last beyond our predicted 5-year growth period. He says, “my team is still working on sales that originated in 2007 and 2008, thirteen years later. We will be working through this distress for at least ten years to come.”

Bid-Ask Spread to Lessen 

Distressed deals in 2020 were also challenged with a large bid-ask spread, a leading indicator of illiquidity of the market. We anticipate that the spread shrinks in 2021, due to lenders having more realistic expectations of below-par sales and increased available capital.

Chris Skinner, author, speaker and expert on banking says the lasting impact will stretch beyond 2021 saying, “it’s not just in the CRE space but in all aspects of society. Most people had exposures to loss in 2020 and they will pass those losses onto the banks. Expect a major downturn and increasing NPLs through to 2025.”

Hotel and Retail Will Struggle to Recover; Office Recovery Uncertain

FitchRatings reports that hotel and retail delinquencies rose to $2.0 billion in December 2020 from $1.5 billion in November. New delinquencies were largely made up of $1.2 billion in hotel loans and $582 million in retail loans. The delinquency report from Moody’s Analytics paints the same picture.

Adam Horowitz, Principal at Lever Capital Partners, shares a different perspective. “Every time there is a downturn in the market, funds are raised with the anticipation of a flood of NPLS hitting the market,” he says.

Research from Real Capital Analytics indicates that CMBS had the highest leverage and market share during the last crisis. This time around, we are seeing higher leverage with direct lenders and banks. However, CMBS is more concentrated in the hotel and retail areas, which will be reflected in deeper discounts on CMBS distressed sales.

Marco Santarelli, Founder and CEO of Norada Real Estate Investments points out that while the commercial space is suffering, residential real estate remains strong. He says “the brick and mortar retail space has suffered the most, but demand for homes, logistics and storage have increased.”

Unanimous Uncertainty and Novel Ideas Around Office Recovery

CBRE predicts that the office sector will recover the slowest from pre-pandemic investment volumes. The cloud of uncertainty around the future of work and office spaces are widely shared across the board, with a general consensus that evolving trends that include remote and flexible working are here to stay.

New York Times editor, Matthew Haag, suggests NYC’s real estate can be positively transformed if office spaces are converted to residential spaces. Data shows that job growth in New York City has tremendously outpaced housing growth, leading to a massive housing shortage. While this would require zoning and density rules to change by the City Council and State Legislature, this is one of many novel ideas presented due to the uncertainty around a return plan to corporate offices.

The report states that only 10% of Manhattans’ 1 million office workers are physically reporting to the office, and filings to erect new buildings dropped by 22% in 2020, the lowest number since 2010.

AI and Technology Will Transform the Way CRE NPLs Are Sold Forever

“The real estate industry as a whole has been very slow to adopt new technology,” Santarelli states. His sentiments are widely shared amongst experts interviewed, confirming a need for broader capabilities of technology platforms to fully meet the increasing demand to manage CRE deals.

The success of lenders, brokers, and CRE firms in a post-COVID world depends on the extent to which their people can perform in remote work environments. Deloitte reports that most CRE companies are unprepared to meet the demand in this wave of distressed debt.

Jim Berry, Vice Chairman and US real estate leader at Deloitte states, “While the pandemic was an eye-opener, we see it as an accelerant of existing trends. It is telling that 56% of CRE respondents to our 2021 CRE Outlook survey said that the pandemic exposed shortcomings in their organizations’ digital capabilities. Only 40% of respondents said their company has a defined digital transformation roadmap.”

It’s clear that digital adoption is not enough – a digital transformation is necessary for firms, brokers, and sellers to keep up with demand and operate efficiently.

Horowitz shares how technology is helping his firm today by saying, “Technology helps with the two main components of our business; who needs capital and where to find it. There are various ways to determine whose loans are coming due, what projects are on the docket for future development, and what assets are currently in default.

On the capital side, technology is helping us determine capital availability, making sure we connect with the right person at that firm, then create a process using technology to close the deal in the most efficient way.”

Technology platforms driven with AI, like Metechi, help fill in the gap to meet this increasing demand. Increasing analytical capabilities coupled with security and transparency will transform the way the market will operate. To find out how you can buy and sell CRE NPLs at scale, schedule a free demo with Metechi today.


About Our Contributors

Brock Cannon serves as the head of national loan sales with the Newmark Loan Sale Advisory Group. Based in the firm’s New York headquarters, Brock focuses on secondary debt transactions on a national basis. Brock’s experience with loan sales is extensive and includes the origination of debt and equity financings, restructuring and modifications of distressed loans, loan servicing, loan sales and investment sales. For more information on how to get on the investor list, speak with Brock here.

Chris Skinner is an author, expert and speaker on banking, finance and fintech. He is the author of the The Finanser blog and chairs the Financial Services Club. He defines purpose-driven banking as more than sustainability or ESGs. He likes to pose the key question: if your company doesn’t stand for something then it will fall for everything. What does your company stand for? 

Trisha Connolly is a Senior Managing Director at B6 Real Estate Advisors focusing on equity and debt transactions for the capital advisory team with clients across the country and a focus on the lower Manhattan territory. Ms. Connolly specializes in commercial real estate financing with over 15 years of experience including loan restructure, term financing, syndicated credit facility, construction financing, acquisition financing and advisory and joint venture equity structures.

Adam Horowitz is the Founder and Principal at Lever Capital Partners. Lever focuses on two types of transactions; large one-off deals for institutional sponsors ($50MM+) and programmatic equity investments for established owners looking to build out a niche platform ($10MM+).