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The next real estate market and economic downturn: a source of great opportunities

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In a nutshell, there is a huge debt problem in the US. The alarms went off in 2019 and the fire is growing in 2020 fueled by the coronavirus pandemic’s economic relief packages. But not all is bad news, there are  extraordinary investment opportunities  in this climate. Every month we will update the reader with the latest news in the real estate debt market.

Monthly Snapshot: CRE, CMBS, CLO, & Lending Updates. (Corporate real estate loan markets and bank lending markets).

Source: Trepp – Sept 2020

Residential

– There’s only a minor uptick in residential default rates, due to a government imposed nation-wide moratorium on residential foreclosures and evictions, though after December 31st, a tsunami of defaults and evictions are expected.

– Outstanding single-family loans are at an 8.22 % delinquency rate, according to the Mortgage Bankers Association. (This figure includes loans in forbearance.) At the beginning of the year, it was only 2.36%, a significant increase.

Source: Mortgage Bankers Association

Commercial

  • The commercial default rate increased from 0.36% to 0.59%, reaching its highest level (225 billion dollars) since the recovery period after the last recession, but still well under the 9% delinquency rate for Commercial Real Estate (CRE) loans at the peak of the financial crisis.
  • Hotels assets are the biggest source of overdue loans, at a 26% special servicing rate. Now, it is safe to assume that many forbearance agreements have been offered to commercial borrowers; although, there is no reliable data on the overall number.  
  • Retail loans have a current special servicing rate of 18.32%, which means that a significant amount of retail loans are now in the hands of special loan reorganization administrators. Many will end in foreclosure.
  • Office loans have a special servicing rate of 2.85%.  We assume this will begin to rise, as landlords run out of incentives to keep tenants in place, or tenancy continues to drop.
  • Multifamily special servicing rate is 2.66%.  This is also a rate we expect to change as eviction moratoriums expire.
  • Industrial special servicing rates are at 1.17%.  The Industrial sector is improving, mostly due to the growth in online retailing.
  • The CMBS (Commercial mortgage-backed securities) world is busy.  Retail and hospitality assets have begun moving to special servicers, who perform default and workout services for CMBS pools. Some hedge funds are moving to offload CMBS to investors as fears of malls, hotels and offices collapsing under a new COVID normal increase. Other private equity groups, such as Starwood Capital have set in place new $11 billion funds to acquire distressed assets.

Commercial mortgage-backed securities (CMBS) are fixed-income investment products backed by pools of mortgages on commercial properties, not by residential real estate. 

Source: Trepp ‘s July 2020 historical Commercial Mortgage Back Securities (CMBS) report.

National Debt and Capital Markets?

  • Markets world-wide have been erratic to say the least.   We are seeing 2% to 5% swings daily.  This sort of volatility can be alarming to investors worldwide, pushing many to park their money in downturn market strategies, such as Gold. 
  • there is a huge debt problem, already existing in 2019, it worsened in 2020.
  • Bond markets, which consists of sovereign, municipal, and corporate debt (that may or may not be backed by an asset) continue to be busy, with interest rates at the lowest level, concerning many economists of the limitations this imposes on the FED when needing to motivate the economy.
  • US debt sales are high.  Many investors in debt are not being compensated for the risk and if default rates spike, it could turn problematic for many investor groups who are unwilling to hold the paper until expiration.

Interest Rates!

  • Interest rates for sovereign debt and commercial deals remain at an all-time low.  Deal flow for commercial loans have slowed, but still trickling in.  

Global Debt

  • Global debt has exploded, hitting a new record of 270 trillion dollars, more than 330% of the global GDP, says the Institute of International Finance.
  • This debt load consists of sovereign debt (US Treasuries), municipal debt, corporate debt, bank lending, and consumer debt. 
  •  It is set to go higher due to record low interest rates and higher borrowing levels incurred by individuals, companies and governments to cushion losses from the pandemic. And guess what? It was already setting new records, pre-COVID19.

Banks

  • The US banking system seems to be on solid footing, or so says the Kansas City Fed leader Esther George, “Few stresses have emerged across banks despite the severe economic contraction.” Though since  last year, the FED branches have been rescuing the overnight (Repo) market, as larger financial institutions have not been giving access to liquidity, necessary for mid and smaller banks to meet their FDIC requirements.
  • Banks report that problem assets remain at historic lows, but as the assets they have lent continue to default on their obligations, we expect to see many flash sales of distressed assets as liquidity becomes unavailable.
  • The shadow banking system (unregulated financial intermediaries) are more difficult to monitor given their private status. What we do know is that by the end of 2019, 50% of all commercial loans were in the balance sheets of private groups. Their unregulated nature allows them to lend at terms considered risky even pre-2008 crash.
  • Just over the past couple of years, these lenders have tightened up their underwriting procedures and are demanding more concession from borrowers. 

Overnight repo: A repurchase agreement in which securities are sold provided that they will be repurchased on the following day. Financial institutions use overnight repos as a means of raising short-term money for financing inventories. (Dictionary by Barlex)

Source: Federal Reserve

By: Nitza Soledad Pérez, CGTN América

Information from the interview with: Ralph Stebenne, CEO of Element Finance Group

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