U.S. commercial real estate transaction activity plunged in the second quarter according to a Real Capital Analytics (RCA) report a near 70% drop in transaction volume, the lowest level of a second quarter since the global financial crisis.
There is a huge gap between CRE buyer’s interest and sellers expectations on what a fair valuation should be since Covid-19. Property owners still have a perception that their property is worth what it was prior to March 2020, while buyers aren’t inclined to buy anything until they feel the market has reached a lower level based upon new assumptions in their financial forecasts.
Despite a record number of loans going into special servicing and some lenders preparing to proceed with action, many are still trying to work with borrowers who have a possibility of overcoming the situation. As lenders begin to decipher which companies and borrowers have a better chance of making it out of the crisis, and which aren’t, that’s when more activity will kick off in the distressed market. Lenders in many jurisdictions are still not able to foreclose. When those restrictions end and lenders are able to enforce their rights, it will become obvious which borrowers will be in a seriously distressed situation, which will result in lower valuations.
There will be a lot of distressed loans and properties that will need to find a fair market value for new equity to enter. A couple of the CRE sectors currently challenged are hospitality and retail, however, as the economy continues to drag on with no hope for a quick rebound expect others sectors to be hit like apartments and office buildings.
It’s clear the pain from the COVID-19 pandemic has not been experienced across all property types. RCA reported more than $30 billion in second quarter’s inflow of distress, with retail and hotel assets accounting for over 90% of that. Industrial represented less than 1% of all new distress, and Faber says student housing and office are still big question marks. The level of potentially distressed assets far outweighs that of outright distress and is distributed more evenly across property types. RCA says apartment assets accounted for more than 20% of potential distress in this quarter, while offices represented about 15%.