Expect Fewer Distressed Asset Opportunities Than in 2008
This recession is fundamentally different than the Great Financial Crisis in 2008, and as a result, the opportunities to benefit from the market dislocation will also be much different. Specifically, there will likely be fewer distressed asset sales in this down cycle than in 2008—where investors were presented with big opportunities to buy assets at a discount. This round, strong fundamentals heading into the recession will help to stabilize pricing and reduce distress in most asset classes.
“The fundamentals for office, multifamily and industrial product heading into this downturn were very solid,” Kevin Shannon, co-head of U.S. capital markets at Newmark Knight Frank, tells GlobeSt.com. “Owners, generally speaking, were more disciplined during this downturn as compared to 2008, and construction activity has been moderate. There is also no banking crisis this time around, suggesting there will be fewer opportunities to acquire distressed office, multifamily, and industrial space.”
However, retail and hospitality assets—which have been impacted significantly by the pandemic and mandated closures to retail businesses and travel—will see more distressed opportunities than the other real estate food groups. But, there are lessons to be learned from 2008. “Lenders though learned that “extend and pretend” was a fairly successful strategy during the last down cycle as time allowed asset values to recover; however, this lender holding strategy will be tougher for many of the distressed retail assets in need of major repurposing,” says Shannon.
While the market for distressed asset sales may not manifest, buyers are holding out hope for a reduction in pricing. The trend is creating a wide bid-ask spread for current transactions. “There is definitely a bid-ask gap right now as investors look for data points on post-COVID rents and the velocity of the recovery,” says Shannon. “The debt markets also caused much of this bid-ask spread.”
On the other hand, the debt markets have reopened after stalling at the start of the pandemic, helping to drive transaction activity. “The good news is the debt market appears to have bottomed and is improving each week–rates are now generally within 40 to 50 basis points of pre-COVID debt for stabilized assets,” says Shannon. “This improvement has allowed for an uptick in transaction velocity, especially for core and core-plus risk profile assets.”
The dynamic has pushed deals through with a 5% to 10% price adjustment for core office assets compared to the pre-COVID market and a flat to 6% price adjustment for core industrial assets. “Pricing for value-add product, however, has notably shifted from pre-COVID levels since most of these high profile transactions are in the hospitality and retail sectors,” adds Shannon.