Wall Street isn’t always right, but when a trend emerges on the street, it pays to take notice. And the latest trend should send chills down your back if you own commercial real estate in the United States. Firms such as Cohen & Steers, Goldman Sachs, and EQT Exeter, among others, are raising billions of dollars to target distressed assets and those slumping in value. The volume of distressed commercial real estate grew by $8 billion in the second quarter, according to data provider MSCI Real Assets. Commercial property values have fallen by 10%-15% from their peak in the third quarter of 2022 and are expected to drop another 10%, according to Rich Hill, head of real-estate strategy for Cohen & Steers. And it isn’t just the well-documented office market suffering steep declines: multi-family and mall operators have seen their properties decline in value and are now more vulnerable than ever as they face refinancing at much higher rates.
Given current market conditions, Wall Street expects owners to capitulate on pricing and an uptick in sales activity in the months and years ahead. In what may be a harbinger of things to come, Clarion Partners recently unloaded a downtown San Francisco office tower for $41 million—a painful discount from the $107 million they paid in 2014. Certain assets are so underwater that a restructuring of the capital stack isn’t worth the professional and other transactional costs to even try. In those cases, owners are handing—or more likely throwing—the keys back to their lenders. Also, expect regional banks—seeing the pending carnage if interest rates remain stubbornly high relative to where they were just a few years ago—to begin to unload much of their commercial loan portfolios at discounted prices. Wall Street investors will be ready, willing, and able to scoop up these under and non-performing assets.
Still, a world of distressed asset sales is not a foregone conclusion. It is possible the Fed tames inflation without tipping the economy into a recession but I wouldn’t count on it. Even if the so-called soft landing is accomplished, interest rates may remain high and the Fed funds rate doesn’t always correlate with 10-year treasuries (at least in the short term) which is a better predictor of commercial mortgage rates. This isn’t a Gamestop short squeeze situation where Wall Street got beat at its own game; this time around the sharks smell blood and the feeding frenzy is inevitable. For those who still can, heed the words of Amazon founder Jeff Bezos and “batten down the hatches.”
Website Source:
Grant, Peter. “Wall Street Is Ready to Scoop up Commercial Real Estate on the Cheap.” The Wall Street Journal, Dow Jones & Company, 16 Aug. 2023, www.wsj.com/articles/wall-street-is-ready-to-scoop-up-commercial-real-estateon-the-cheap-6edac64f.
