As commercial delinquencies increase, one industry expert sees deferrals and discounts ahead
As delinquencies increase in the commercial real estate space, some mortgage holders may find themselves in a situation where they have no choice but to sell their properties. One expert believes this could present a significant opportunity for mortgage brokers and investors to secure substantial discounts.
Robert Martinek (pictured top), director at EisnerAmper, believes that once extensions and deferrals are no longer an option for a delinquent property, significant bargains may become available to investors.
“We’re going to see when something has to sell, it’s going to sell and it’s going to sell at a big discount,” Martinek told Mortgage Professional America. “I was looking at a building in Minneapolis, and I think it's the biggest building in Minneapolis. I think it was originally purchased for $95 million, and I think it sold for $15 million. It was something absurd like that. They just basically walked away.”
He believes some struggling markets could provide opportunities for investors and for potential tenants. Many of those markets are in California and Texas.
“I think you’re going to see more distress,” Martinek said. “California, you know that the West Coast is not good right now. The Dallas and Houston markets are not great. I think we’ve passed the peak of vacancy. It’s very slow. What I’m seeing is that tenants you used to get $50 or $75 work letter. Now they’re getting $150 work letter. They’re getting an incentive to sign. They’re getting 12 months free rent.”
Paying the price
Building owners in those difficult markets are having to find ways to entice tenants into struggling commercial spaces. They often trade more free rent for less out-of-pocket expenses in tenant improvements (TIs).
“I’ve seen where the developers' pockets are empty, saying ‘How can I fund these TIs?’” he said. “They say, ‘I’ll give you more free rent up front, less TI.’ That type of thing. So, I think everyone is trying to work that out. I think it’s going to take a while before it’s resolved.”
Another thing hurting the commercial market has been the elevated interest rates. While everyone waits to see if the Federal Reserve decides to cut rates later this month, potential sellers in the commercial market don’t want to give up low-rate mortgages for a higher one.
“It’s all supply and demand,” Martinek said. “That last couple of years, people don’t want to sell their properties. If my rate is under 3%. If I move, I don’t want to sell my property. I don’t want to buy it at 6.5%. And everyone’s in that boat. The little inventory that’s out there, people want it. If interest rates go down, I think you’re going to see more supply.”
More office space conversions
While Class A office space continues to be in demand, Martinek said Class B and C space continue to struggle.
“You have your Class A space that everyone’s chasing,” he said. “You still have your B and C office space that’s in the doldrums, that’s been in for years and years. We’re seeing some cities that are really doing badly office space-wise.”
One of the cities that Martinek noted has made a turnaround is New York City, as developers turn distressed commercial properties into residential spaces.
“New York is one of those that’s actually turned around pretty well,” Martinek said. “And I think a lot of it has to do with some conversions. Last I saw, I am aware of 10 million square feet that’s being converted from office to residential. New York City wants housing, and part of that will be affordable housing.”
He noted that there was considerable competition in the lending space. In the past, it had led to some questionable practices in the loan completion process, but he believed that the majority of loans being closed in the current environment were good ones.
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“The banks are losing it to the debt funds, and there are alternative lenders,” Martinek said. “People want to get things done. They have quotas to make. So, you see some questionable decisions being made. But I think for the most part, only those good deals are being done. So even if you make a small error on that, it’s not like you’re lending on a value-added Opportunity Fund of 10 vacant buildings in New York. That’s just not going to happen.
“Everyone’s chasing that good deal that they’re happy with. Like the industrial portfolio that Blackstone has. Or data centers, which keep going up. Those things that everyone’s sure of. The typical banker might not get that deal, but that deal is going to get done by somebody.”
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