2020s Commercial Real Estate Distress: Causes and Consequences

The 2020s commercial real estate market has been marked by significant distress, with many properties struggling to stay afloat. The COVID-19 pandemic was a major contributor to this distress, as widespread lockdowns and social distancing measures led to a sharp decline in foot traffic and revenue for many commercial properties.

The pandemic accelerated an already existing trend of retail store closures, with many iconic brands such as JCPenney and Sears filing for bankruptcy. According to the article, JCPenney filed for bankruptcy in May 2020, while Sears filed for bankruptcy in October 2018, but was still struggling in 2020.

Office buildings also felt the pinch, as remote work became the new norm and many companies downsized their office space. In fact, the article notes that office vacancy rates increased by 10% in 2020, with many buildings struggling to find new tenants.

The commercial real estate market is facing a perfect storm of challenges, including high levels of debt, declining property values, and a lack of investment.

Readers also liked: Damac Properties Ceo

A large client that owns about 20 hotels anticipates that it will be able to hold onto all of them except one, according to Teresa Goebel, chair of Goodwin’s hospitality practice and a member of its real estate group.

Distressed assets have changed hands at fairly modest discounts, typically up to 20% below pre-covid prices, due to strong investor demand and lender patience for a post-pandemic recovery.

More than $320 billion has been raised for commercial real estate, according to Preqin.

Investors are waiting to see when demand will come back to the commercial real estate market, making it a wait-and-see situation, as Goebel pointed out.

Distressed debt dry powder is also available, which can be used to take advantage of opportunities in the market.

Check this out: Will Reits Recover in 2024

Roughly $430 billion of commercial real estate debt comes due this year, out of $2.3 trillion that matures over the next five years.

Investors raised a record amount of capital for distressed-debt strategies last year, and there’s still $84 billion sitting on the sidelines.

Intriguing read: 2022 Russian Debt Default

Commercial property distress gauges are at the highest level since 2013, and investors will have plenty of places to put their money to work.

Bank loan delinquencies have started to tick up in certain sectors, with hotel delinquencies more than doubling in the third quarter to 3.2%.

Wardman Park Hotel, a historic hotel in Washington, D.C., sought Chapter 11 in January after it was sued by its hotel manager for not paying necessary operational expenses.

The Williamsburg Hotel filed for bankruptcy this week amid a $68 million dispute with one of its biggest creditors.

The market for distressed commercial real estate has been impacted significantly in 2020.

About $1.4 billion of distressed properties sold in the fourth quarter, led by hotels, according to Real Capital Analytics.

The market was largely frozen in the second and third quarters of 2020 as lenders experienced uncertainty due to the pandemic.

JLL traded about $1 billion of assets in the fourth quarter, out of $1.4 billion for the year, according to Will Sledge, senior managing director in JLL's capital markets group.

Lenders have been granting credit waivers and waiting to see how the pandemic played out, rather than selling assets into a market with unknown demand.

Suggestion: Reg B Appraisal Rules

Loan workouts and restructuring became increasingly common in 2020 as commercial property owners struggled to stay afloat. Many property owners were unable to meet their loan obligations, leading to a surge in loan defaults.

In 2020, a significant number of commercial properties were sold at auction, with some properties selling for as little as 20% of their original value.

Loan restructuring and workouts allow property owners to rework their loan agreements, often by extending the repayment period or reducing the interest rate. This can provide much-needed breathing room for property owners who are struggling to meet their loan obligations.

In 2020, it's reported that over 10% of commercial properties in the US were in some stage of loan distress, with many more properties at risk of default.

The most common types of loan workouts in 2020 were interest rate reductions, loan extensions, and debt forgiveness. Property owners were also using loan workouts to restructure their debt, often by consolidating multiple loans into a single loan with more favorable terms.

As the commercial real estate market continued to struggle, loan workouts and restructuring became a crucial lifeline for many property owners.

Explore further: Vici Properties Net Worth

As we navigate the complex landscape of commercial real estate distress in the 2020s, it's essential to understand the key practice areas that can help mitigate the situation.

Commercial leasing is a crucial aspect of commercial real estate, and companies that specialize in this area can help businesses find suitable spaces or renegotiate existing leases.

Distressed real estate loan workouts and enforcement are also critical in this context, as lenders and investors look for ways to recover their investments.

Real estate finance is another vital area, as it involves the funding of commercial real estate projects and can help prevent defaults.

Here are some of the key practice areas that can help address commercial real estate distress: