Distress Mounts in U.S. Property Market Frozen by Pandemic
Investment sales of U.S. commercial properties fell by 68 percent year-over-year in the second quarter, according to RCA. The U.S. commercial real estate market is showing ever greater signs of stress, but there are still few deals to be had. Transactions fell 68% in the second quarter across all property types compared with 2019 as potential buyers and sellers remained far apart on the prices of buildings, according to data released Wednesday by Real Capital Analytics.
The paralysis set in despite near-record amounts of capital ready to be deployed by some of the world’s biggest real estate investors. “The buyer and seller expectations are not aligned,” said Simon Mallinson, an executive managing director at RCA. “Sellers aren’t being forced to the market because there’s no realized distress and buyers are sitting on the side-lines thinking there’s going to be distress.”
Industrial Strength
Second-quarter sales plunged 70% for apartments, 71% for offices, 73% for retail and 91% for hotels, according to RCA. Industrial property transactions were a brighter spot. Sales dropped only 50% in the second quarter and manufacturers leased space to avoid supply chain disruptions. For markets to function, there needs to be some agreement on what assets are worth, but the surging coronavirus outbreak is fuelling uncertainty, making the outlook for commercial property just as cloudy as it was in March when lockdowns put the economy into deep freeze.
Buying Time
Approximately $90 billion more of commercial real estate is “potentially troubled,” RCA reported, meaning it’s in a forbearance plan, suffering rent collection problems or early-stage delinquencies. That includes $14.5 billion for offices and $20 billion for apartments. Still, delinquent borrowers don’t face pressure to sell yet. Lenders are focused on ways to buy time, delaying distressed property from coming to market, according to Lisa Pendergast, executive director of the CRE Finance Council, a commercial real estate trade group.
Cheap Money
Prices have also been propped up by low interest rates. Low borrowing costs mean investors can expect higher returns on real estate than Treasury bonds, even if vacancy rates rise or tenant delinquencies increase, according to Michael Fascitelli, former chief executive officer of Vornado Realty Trust. “The cost of money is one of the biggest costs of an asset for real estate,” Fascitelli said recently.
Topics: Real Estate Market, Investment
Work cited: John Gittelsohn, Bloomberg, July 22, 2020
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