On January 26, 2021, I participated in a distressed asset panel at the Dressed for Distress Forum hosted by Commercial Observer along with Aaron Ratner of Empire State Realty Trust, Michael May of Silverstein Properties, and Robert Verrone of Iron Hound Management Company. Fred Berk of Friedman LLP moderated.

We covered several interesting issues, including: (a) the similarities and differences between the current cycle and the great recession of 2008, (b) the impact on lenders and borrowers of COVID-19 and resulting legislation such as the moratoria on evictions and foreclosures, (c) the current CMBS environment, and (d) short- and long-term opportunities.

Here are my top 10 takeaways from the discussion:

  1. In 2008, the economic distress was widespread, across the entire economy. This time, economic distress is more concentrated:  hospitality and retail, for example, have been hit hard, yet delivery and shipping companies have thrived. So, there are clear “winners” and” losers” in this unique environment.
  2. In 2008, the financial institutions were seen as the villains.  This time, it is a villain-less cycle – except for perhaps the coronavirus, itself. Now, the financial institutions are part of the solution, i.e. through their involvement in the stimulus packages, such as the Paycheck Protection Program (PPP) and the Main Street Lending Program.  
  3. Thus far, lenders are not yet acting aggressively, with many offering some deferral of payments. This is based on the CARES Act, and more recently, the Consolidated Appropriations Act of 2021 (enacted in late December 2020), as well as a pragmatic understanding that the underlying tenants, in many cases, are unable to pay rent to the fee owner, and thus the fee owner, as borrower, is unable to continue to make loan payments, at least in the short term.  However, this will invariably change as the moratoria end and as lenders do the math – comparing the projected percentage recovery on their loans in the case of foreclosure to the projected percentage recovery under various workout scenarios.
  4. As part of the foregoing calculus by both lenders and borrowers, in addition to tenant improvements and brokers commission, they should take into account more hidden expenses when the occupant is being replaced, such as costs related to upgrading the building to conform to new energy efficiency laws and to the Americans with Disabilities Act. 
  5. The Bankruptcy Courts have been somewhat helpful to borrower/debtors and the Consolidated Appropriations Act has made it a bit easier for landlord borrowers by giving them relief from bankruptcy preference laws for deferred rent payments.
  6. Commercial mortgaged backed security (CMBS) loans have suffered from slow decision-making, as they did in 2008. That is the tradeoff for the better terms and rates provided in CMBS loans. Borrowers either did not heed the lessons of 2008, or they made a conscious decision after weighing the risks and benefits of such CMBS loans.  
  7. On the other hand, Borrowers need to be realistic when making proposals to lenders. Unrealistic proposals will find their way to the bottom of a special servicer’s “to do” list, simply because it is easier to make progress on proposals that are more likely to be approved. If a borrower wants to make rapid progress, shooting for the moon is not likely to be a good strategy.  
  8. Panelists were bullish on the New York office market. Professionals are tired of working from home and young professionals will want to return to New York and other large urban areas where there is hustle and bustle – restaurants, bars, etc. However, this was tempered by the recognition that working from home several days per week will become much more prevalent than in the pre-COVID era, especially in places with longer commutes such as Los Angeles. As a result, businesses will either need less space or will find it easier to expand their workforce.
  9. In the short-term, opportunities exist to acquire fundamentally sound assets, or loans secured by those assets, and that there is a lot of upside in these deals. In the long-term, opportunities include acquiring assets which would not be profitable under their current use, but would need to be repurposed, e.g. from retail to multi-family, mixed use or last mile delivery. 
  10. Despite the opportunities, there was some disagreement among panelists regarding the ready availability of capital – with one panelist saying there is a lot of “dry powder” out there and another pointing out that in the trenches, it is not that easy to get funding to acquire distressed loans.

In sum, it was an enjoyable, and hopefully, informative session. Although this cycle is different than the last recession in many ways, opportunities for acquiring distressed assets and distressed loans do exist, and are expected to increase over the next 12 months, as the stimulus packages and moratoria expire.