Link to Article: Opportunities Open Up For Investors Looking For CRE Distress Everyone is talking about distressed opportunities, well where are they? If you do not have time to read the entire article, please allow me to extract and apply the relevant.
"What is different about this distressed cycle is that most of the lenders are not foreclosing and taking title to the CRE assets, managing, and leasing them for a few months and then selling the properties. They are more likely to sell the note/mortgage rather than foreclose on the property."
Buying notes is riskier than buying foreclosed properties, who will benefit?
"This presents a unique and interesting opportunity for astute distressed investors, who are experienced in acquiring mortgage notes secured by commercial property and in the arduous foreclosure and bankruptcy process."
What should they be doing?
"Distressed investors should be raising capital right now to take advantage of the upcoming plethora of defaulted CRE loans."
Not sure there will be a "plethora." Help me understand the supporting factors.
"Higher interest rates," "reduction in occupancy, revenue and NOI and inability for the borrower to cover the current debt service," "mortgage loan and covenant breaches," "higher and in some cases prohibitive costs to eliminate interest rate risk from floating rate loans," "a significant decline in the value of the property," and "loss or bankruptcy of major tenants."
How much are we talking about?
"About 2.0% or $90 billion of the total CRE loans outstanding of $4.5 trillion" and "if the average defaulted loan is $25 million, there will be 3,600 distressed deals during the next two years."
In addition to value declines due to the above conditions, how much more should note purchasers expect?
"Since potential distressed investors have to go through the foreclosure and possible bankruptcy process... they will need an additional discount on the note of at least 10%-15%."
Adding up property level performance, rising interest rates, cap rates, and a note purchaser discount, what can we expect?
"This represents a 37% to 59.5% and 85% to 90% discount on the original property value and loan amount, respectively."
Since it is unlikely all of the stated assumptions will concurrently occur at a property, discounts will vary widely. Let's not ask how much right now, let's focus on being ready.
Contributed by: Kyle Nagy
Kyle Nagy is a founder and Director of CommCap Advisors. Kyle started his commercial real estate career in 1999 as the Real Estate Analyst for the Las Vegas office of GMAC Commercial Mortgage, an international real estate finance company. Prior to leaving and forming CommCap, Kyle was instrumental in the growth and success of the Las Vegas GMAC office and was one of the youngest Vice Presidents within the company. During his finance career, Kyle has successfully originated, underwritten, and closed over $900 million in loans with Life insurance Company, Wall Street Conduit, Bank and Agency Lenders.
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