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?

The Great Migration: Remote Work Has People Moving Again

The US has been a ‘low move’ country for a while. The Census Bureau keeps statistics on how many Americans move to new residences each year, and their data shows that the national mover rate has been on the decline for almost 40 years. It peaks at just over 20% in the mid-1980s and has been trending down since. Then came the Covid-19 pandemic and its remote work revolution.

According to a new Apartment List report, published in May 2021, the pandemic has “sparked a rebound in residential migration”. This comes out of their recent remote work survey which drew qualitative comment from some 5000 Americans, and used the US census data, to establish that 16% of Americans moved between April 2020 and April 2021 – “the first increase in migration in over a decade”.

Wealth has legs

The research finds that the largest increase in this residential migration rate over the last year can be seen in high-income households (earning over $150,000) which is particularly interesting as people in this segment have been the least likely to move in the last decade.

Remote workers, specifically, were a whopping 53% more likely to move than on-site workers – making remote work “one of the major drivers in this trend”, a trend they expect to “remain prevalent even after the pandemic wanes”. 

“Wealthy movers in 2020”, the report says, were “more likely to move further from job centers in order to buy homes, enjoy more physical space, and live in places with lower cost-of-living” as a result of their flexible and high-wage jobs.

Six-figure households, the survey concludes, were “twice as likely to purchase a home” and “more likely to have gained additional physical space” because they are able to put greater distance between themselves and their previous place of work/employer.

Heavy burdens to bear

This is a trend turned on its head, as traditionally wealth and likeliness of moving have had an inverse relationship, where low earners move more often than high earners. In 2010, for example, there was a 27% movers rate among workers with household incomes less than $25 000 – compared to a 9% rate in the segment where household earnings were $150 000 or above.

This data further underlines how the Covid-19 pandemic had a disproportionate effect on low earners. That is not to say that low earners didn’t move in 2020 – they certainly did in droves. We see that this group had a movers rate of 28% according to the survey, and the Apartment List argues these workers moved “in search of more affordable living arrangements” in the face of income insecurity.

Widening divide

While the increase in moving can be seen in a positive light, for the real estate sector and the recovery of suburbs and remote work spots, there is also the worry of a growing divide: what Business Insider calls a K-shaped graph – describing the different trajectory of “professional workers” and “everyone else”, a trend also seen starkly in the millennial generation.

Social: Have you recently moved or is your employer looking at continued remote work options? What do you look for in finding your ideal area or city?

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.  

Bear or Bull

PARTNERS, Thought leadership

Bear or bull: CRE’s investment prospects

The commercial real estate (CRE) reporter Konrad Putzier recently published a fascinating article in the Wall Street Journal (WSJ) about the sector’s resilience, and specifically investors’ confidence in that resilience. Published in May 2020, the article unpacks the factors that have worked into the sentiment analysis, showing that despite the hard knocks of the pandemic, there is a lot of positivity about the future of CRE.

No small troubles

In many ways, CRE was a prime candidate to be severely impacted by shelter-at-home orders and the migration of workers to their homes. High-rise office buildings, the report starts, stood largely empty, and around a half of hotel rooms went unoccupied. Retail was also under severe pressure. Despite these layered burdens, the CRE market in the US remained relatively strong and is looking up in 2021.

“Prices fell far less than after the 2008 financial crisis and are already rising again,” he writes. “The number of foreclosures barely increased. Pension funds and private-equity firms are once again spending record sums on buildings.” This is, the article argues, partly due to the federal government taking bold measures to support landlords and protect them from “suffering steep losses”.

According to Green Street analytics quoted in the piece, CRE prices did fall some 11% in the March to May 2020 period (compared to 37% after the 2008 crash), but have rebounded by 7% – “erasing more than half their pandemic declines”.

Investor confidence

The sector’s other saving grace is that it remains a darling of investors. The WSJ points to “big global pension funds… raising their allocations to commercial real estate”. Private investment funds with a real estate focus had $356 billion in cash reserves in April, and a study from Cornell University and Hodes Weill & Associations found that 29% of large institutions said they planned to increase their CRE exposure.

Inflation haven

Analysis from Globe St underlines some of the same findings as the WSJ report, specifically in that real estate is profiting from its perception as an inflation hedge, and despite a high vacancy rate for offices, it describes analysts as “still bullish on the sector”. In fact, real estate investment trusts (REITs) have been the best performing asset class in 2021 so far.

Moody’s however takes a more cautious view. Also speaking to Globe St, they say, “while industrial will remain steady and multifamily family rents and vacancies will turn around in the short term, the future of office, retail, and some hotel subtypes is uncertain”.

Part of the package

The contemporary CRE investor can however bet on both outcomes through diversification. Writing for the Forbes Real Estate Council, Andrew Lanoie of The Impatient Investor has penned an even-handed explanation of the divergence of real estate and CRE prospects in tough economic times, and how CRE in the investment portfolio – diversified by type and region – can still carry its weight in your wealth strategy.

In fact, he concludes “investing in commercial real estate the right way can shield your portfolio from the next downturn.”

Social: Are you bullish or bearish on the CRE investment prospects? Tell us what’s driving your investment choices in this volatile time…

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.