Capital markets: CRE bankruptcy data reveals some surprises

Although many sectors and consumers are sighing in relief that the worst may be over, some media and analysts fear a bankruptcy boomerang effect may yet still shake capital markets. Bankruptcy is both a blow and an opportunity in terms of commercial real estate (CRE) capital markets, but either way, forewarned is forearmed.

Sounding the alarm

Specifically, reporting from Bloomberg Law makes the case that remote work may drive more defaults in the office space market, despite retail and hospitality being the main areas of concern for respondents to their latest Commercial Real Estate Bankruptcy Survey.

Analyst Jeffrey Fuller delves into the numbers and says that “cancellation of office leases and potential vacancies caused by permanent moves to remote work might be behind this” selection by survey respondents.

Still, he thinks the hard stats disagree with the above qualitative data. He writes: “Analyzing the percentage of 90-day delinquencies in each CRE property type using Bloomberg Terminal data reveals that hospitality and retail are at the top of the list, although the rates for both have decreased somewhat since January. Meanwhile, the office delinquency rate has stayed far below those for retail and hospitality.”

Mall collections on the up

Separate data, drawn from Pennsylvania Real Estate Investment Trust, is quoted in a second Bloomberg Law article. They had filed for bankruptcy in November 2020 citing deferred rent payments, but later exited bankruptcy in December.

The first quarter of 2021 painted a vastly different picture from 2020, as “rent collections grew to 119% of what it billed in the three months through March 31”. They were expecting an even better April, with collections expected to hit some 140% of monthly billings, which indicates that deferred rents are now coming back in.

Not totally out of the woods

Before you pop the champagne though, estimates still put CRE debt coming due this year at some $430bn. And there is a “$450bn market for mortgage loans bundled into securities”, explains ConnectCre.com, based on Bloomberg and data firm Trepp’s figures. Trepp adds that “About 7.58% of the total were at least 30 days late on a payment in January, led by 19.19% of hospitality loans and 12.68% of retail loans.”

An eye on opportunities

As mentioned above, the default and bankruptcy rates are devastating for individual businesses, but do represent a significant opportunity for those looking to get assets at discount rates.

GlobeSt.com points to a portfolio of 15 US hotels “with a floor price of $470 million” that is going to be the subject of a “stalking horse auction” in May. This is when a bid (specifically for a bankrupt company) is made in advance of an auction, serving as a reserve bid.

“Stalking-horse auctions are a routine part of many Chapter 11 bankruptcies, but for investors that have been waiting for distressed assets to come to market, this news was extraordinary,” writes GlobeSt.

[call for social]: What CRE assets or sectors do you think are ripe for renewal as the dust settles in 2020?

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