Although wildly unpredictable throughout the COVID-19 pandemic and the years that followed, institutional investors in commercial real estate experienced strong growth across many asset classes. Leveraging record low borrowing rates and flexible loan structures, large and small investment firms were able to purchase assets with favorable lending structures. Now, much of that debt is reaching maturity and institutional investors are realizing that increases in current interest rates are threatening investment returns.
Because of this, many institutions are being forced to sell out of necessity due to the composition of their loan structure. This means a flood of assets hitting the market at or below market value. Even though the market is seen as more challenging today, opportunities lurk for sophisticated and disciplined investors. Albeit market and economic challenges, investors stand to reap the benefits of patience and the new reality facing current owners who can no longer afford the debt maturity of their portfolios.
Through Biproxi, owner groups with distressed assets have a channel to sell their properties with increased clarity. Since many loans have a time-sensitive requirement for sales, institutions are working to sell efficiently and make connections with brokers who can move their assets.
In addition, other lending structures such as CMBS and REITs are selling off based on reduced investor tolerance of risk. There are many properties investments on the market that retain solid fundamentals, but due to the lower loan-to-value ratio many of these assets face being sold at heavily discounted rates as institutional owners exit the market.
What does this mean for buyers and sellers?
Buyers face challenging market and lending conditions that necessitate shifting expectations for asset fundamentals. As lenders embrace higher borrowing rates, buyers must seek assets that provide high cap rates. This shift will increase the “bid-ask” spreads which in turn will lead to a decline in transaction volumes and increase the difficulty of negotiation.
While traditional capital structures may struggle, distressed assets offer a unique opportunity for clever investors. Interested in distressed assets, and even off-market deals? Biproxi instantly matches you with on and off-market deals that fit your investment criteria. Get started for free.
Due to strong market performance and debt utilization during the pandemic, defaults on commercial real estate loans are to be expected as loan terms mature. According to UBS Global Wealth Management, $5.4 trillion in commercial real estate debt is outstanding, with $1.2 trillion expected to mature in 2023 and 2024 (excluding multifamily assets). Traditional bank lenders are careful to analyze new loans and have reduced overall volume, leaving many investors to seek out new sources of capital.
As massive amounts of debt mature, and interest rates continue to rise, owners are looking to investors for their expertise and creative capital solutions. Exacerbated by the steady growth in inflation, this trend is expected to persist, forcing the market to self-adjust. For distressed assets, many banks are looking to offload their non performing real estate loans to the private market. Many of these shifts are subject to regulatory requirements, offering unique opportunities to sagacious investors.
How will the market continue to move forward?
While distressed assets offer unique opportunities for investors, there are still serious risks involved. However, several tactics can be used to minimize risk when entertaining these new opportunities. As in any transaction conducting thorough due diligence helps to understand and evaluate the level of risk involved and can verify the fundamentals in relation to market trends. Especially with the shift away from office assets, assessing the value and potential uses of commercial space can present new opportunities for value. There is also value in partnering with experienced commercial real estate professionals to help facilitate in depth due diligence and financial discovery.
Another consideration for distressed assets for both buyers and sellers are the tools available to sell time sensitive properties. On Biproxi, sellers can use Private Events™ to create a private auction room and invite buyers that are interested in their asset. For buyers, the Call For Offers tag allows buyers to find sellers that may take a reduced offer due to time constraints.
Even in today's turbulent, and rapidly changing CRE markets, it remains imperative to practice patience. The best opportunities may take time to emerge, and more time to properly evaluate and execute a lucrative deal while mitigating risk.
Understanding what type of investment matches your portfolio and risk tolerance, and not jumping on a rushed deal, can help ensure success in today’s market, and into the future.
