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?

Top Tech: VTS

Recently, we at NAI Pleasant Valley have been sharing some of our top commercial real estate (CRE)-related technology tools in a series of blogs – the kinds of tools that help us perform at the top of our game. This series is about sharing best practices and fit-for-purpose tools, but, please note, this is NOT a paid or sponsored blog. We are motivated only by sharing information with our network.

This is our fourth blog in the series, and here we will be looking at VTS – a platform built specifically for commercial real estate (CRE) leasing and asset management. Read below to see why we love them, and you can explore them directly at www.vts.com/.

What is VTS?

VTS was founded by real estate professionals for real estate professionals because – they say on the website – “they have experienced the challenges facing today’s landlords and brokers first-hand” and want to “empower commercial real estate professionals to work smarter not harder”. Sounds good to us! And to loads of others, apparently, as VTS platform is used to manage some 12 billion square feet.

Data dealer

Additionally, with so many users and properties on the platform, this cloud-based provider is also a data and insights producer, releasing a monthly Office Demand Index. CEO of VTS Nick Romito recently spoke to BisNow’s Make Yourself at Home podcast about his optimism for a return to the office.

According to Romito, based on conversations with some 25 CEOs: “… 95% of folks are going to say, ‘It is mandatory you’re in the office in September.’ Is it three full days or four? No one’s doing less than three that I can see.”

Power platform

Of course, our main concern is the platform itself which is really a multi-tasker with three main components: lease, data, and market. The former (VTS lease) is the workhorse including online deal execution and tenant management, and the latter (VTS market) is all about marketing CRE in a digital-first world. VTS data is probably self-explanatory, offering real-time market data, and fascinating forward-looking data.

Their target market is, thus, just about the whole CRE value chain: tenant reps, brokers, and landlords.

Communication

Although it isn’t their core offering, we also like the active blog that VTS runs which includes company news and their thought leadership-style content. Recent posts that we found interesting include a look at medical offices, retail’s recovery, and market predictions.

What is your top commercial real estate tech? What do you use to track deals and stay on top of leasing? Share your tips with us here.  

Top Tech: CoStar

Top Tech: CoStar

In a recent series of blogs, we have been sharing some of our top technology tools for use in commercial real estate (CRE) – the kinds of tech we use to give us an edge. Please note, though, this is NOT a paid or sponsored blog. We are motivated only by sharing the tools of the trade with our wide network of partners and peers.

Here, in the third such post in the series, we are exploring CoStar – which bills itself as the largest commercial real estate information and analytics provider. Below we get into the specifics of just why we use them. You can find CoStar at www.costar.com.

What is CoStar?

CoStar is a supplier of information and information-powered tools, and they have the kind of data volume that can unlock nuanced analysis of trends and market movers – with 129 billion square feet of inventory tracked and data points on over six million commercial properties.

Their portfolio includes several products, offering a tool for just about any CRE stakeholder you can think of, including brokers, owners, lenders, appraisers, and more.

Established player

Currently being a “big data business” is very trendy, but CoStar are not a new operation. Rather, founded in 1987, they have been an information and research provider for over three decades.

The CoStar Group is listed on the NASDAQ and was recently included in Fortune Magazine’s top 100 Fastest-Growing Companies (in 29th position) – an annual list by the business-focused publication.

The information you need

The platform includes millions of CRE comparative statistics or “comparables”, such as transaction notes, rent, occupation, cap rates, and that ever-important pricing information. You can also use the tool to access data on the status of a property (for sale, under contract, or sold). They also offer the functionality of aerial and map overlays, so you can explore market activity data in direct relation to its location, so you have both content and context.

You can also customize reports, manage your own listings, and access their regular indices and research materials and forecasts.

The connections you want

Over and above crunching the numbers on all things CRE – like inventory, valuations, and more – CoStar maintains a professional directory on almost six million industry contacts in order to foster connections and enable collaborations. Through this, you can not only get the low down on a listing, but also link those deals with names, and those names with means to get in touch.

[Call for social] What are your go-to tools for commercial real estate? And what is the one set of property data you wish you could lay your eyeballs on? Share your ideas with us here.  

Thought leadership: CRE as a proxy for financial stability

In late March 2021, the International Monetary Fund (IMF) published a blog about the “crossroads” that real estate currently finds itself, and warning that this has implications for the wider economies and economic stability. It is a fascinating read and one that really drives home the centrality of the commercial real estate (CRE) sector.

“Empty office buildings. Reduced store hours. Unbelievably low hotel room rates. All are signs of the times. The containment measures put in place last year in response to the pandemic shuttered businesses and offices, and dealt a severe blow to the demand for commercial real estate—especially, in the retail, hotel, and office segments.”

– Andrea Deghi and Fabio Natalucci, writing for the IMF

A proxy for financial stability

The case the blog authors make is that the CRE sector is significant enough, with value and volume enough, that price movements observed within “tend to reflect the broader macro-financial picture”, and warning that the reliance on debt funding makes CRE and the broader economy vulnerable to volatility – and unforeseen shocks, like the Covid-19 pandemic.

This is because of the linkages between global bank’s lending portfolios and CRE. Globally, banks are the largest providers of debt funding for the CRE sector, although in recent years some non-bank financial institutions (the blog gives the example of insurance firms, pension, and investment funds) have seen the value in the asset type too.

The authors fear that shocks or price misalignments in CRE therefore have the potential to cause ripple effects in financial services and banking, as well as broader GDP and GDP growth – underpinning what so many of us in CRE have said for decades: “It is a pivotal and influential sector”.  

Underlying value

This may cause alarm for some – those who remember the crashes and crunches of the sub-prime crises – but it is absolutely critical to emphasize that this is not about over-leveraging. The IMF blog states specifically: “Unlike previous episodes, however, this time around the misalignment does not stem from excessive leverage buildup but rather from a sharp drop in … revenues and … demand”, a change driven by the global pandemic response.

So this blog doesn’t ring a panic button – good news for analysts and CRE professionals. It does however speak to the way that society is changing, and calls for the sector to be cognizant of this and evolve accordingly. This is very much our strategy at NAI Global – we are market-linked, market-informed, and market leaders.

What next?

We are in agreement with the blog authors who say that any misalignments are “likely to diminish” as the economy recovers. This is thus an opportunity to prepare ourselves for the structural changes necessary to keep the sector vital and responsive to trends like working from home and other shifts. An example of the latter is how 2020 heralded an uptick in movement from customer-facing retail to multichannel shopping and e-commerce, which underpins the growth in warehousing. 

So now what?

With apologies to Spiderman, the phrase that immediately springs to mind is: “With great power comes great responsibility”. CRE professionals and institutional funders will need to make smart choices to promote recovery of this essential sector without introducing more risk – responsible lending, innovative funding models, and socio-economic trend-aware strategies. Social: What CRE trends are you watching in your area? And what are the new demands of tenants and developers as we head towards ‘the new normal’?

Closed Deal! 10 AC of Industrial Land in Avon, Ohio.

Hiedi Winston and Debbie Maggard of NAI Pleasant Valley represented the Buyer Millennium on their purchase of 3 parcels totaling 10.4 acres on Mills Road in Avon, Oh. All utilities are on site. The land sold for $655,200. The sale price represents the lack of industrial inventory in NE Ohio. Since 2004, Millennium has provided network owners & contractors with broadband network materials, geospatial engineering, and more. To learn more about Millennium check out their website. https://www.mymillennium.us/.