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The next economic crisis: Empty retail space



There are also fears that sending significant relief to the industry will be seen as a “gift to the president’s friends” as Donald Trump has made his fortune in commercial real estate, said one lobbyist, frustrated by the lack of traction politicians.

“Sometimes people forget the depth and breadth of what commercial real estate is,” said Mike Flood, senior vice president of commercial and multifamily policy at the Mortgage Bankers Association. “What is at risk here is both the opportunity for people to stay in their apartments and the opportunity for people to go to work. So if there is no incentive, there is much less to go back to when we return to normal time. “

The main problem is that no one knows how long the decline in commercial real estate will last. Business travel is not expected to recover for at least a year, so hotels are knocking. And while office buildings have not yet felt the brunt of the decline ̵

1; offices tend to have long-term rents – this will change as many companies rethink their way of working as work from home becomes the norm.

The number of commercial loans that are packaged in “special-service” securities – where troubled loans are transferred to a new manager hired by bondholders to negotiate a payment plan on their behalf – has been steadily rising since March.

And it has become clear that the virus will continue to reduce its revenue for some time, so that even those property owners who have managed to consolidate payments – thanks in part to expired relief measures passed by Congress – may start to slip away.

The loss of paid tenants could affect a wave of property write-offs and possible foreclosures on everything from shopping malls to residential buildings. But not only the pockets of wealthy investors will suffer from widespread write-offs. Eighty-seven percent of public pension funds and 73 percent of private pension funds own real estate.

Borrowers seeking loan relief or considering refinancing also face problems, as the uncertainty caused by the virus does not give them a clear forecast of future revenue streams for their buildings.

“Every lender tries to help, regardless of the form of financing, but sooner or later the borrower needs customers,” Flood said.

The damage is already occurring in the securities market, where mortgages are packaged in bonds sold to investors, which are then repaid through mortgage payments.

One in five loans, grouped into mortgage-backed securities, are on special watch lists, where service loans – companies that collect mortgage payments and advance them to investors – mark potential barriers to future payments, such as a large tenant .

As the crisis has hit some places and industries much harder than others, it is difficult to get a clear, big picture of market problems – one of the reasons lobbyists are struggling to convey the urgency of politicians. Some assets have been destroyed while others are thriving.

The worst affected are hotels and retail, which together account for 40 percent of the mortgage-backed securities market. Months after the locks are lifted, 1 in every 2 hotel rooms remains unoccupied. City hotels, which have some of the highest operating costs, are doing the worst, with only 38 percent occupancy.

And retail, which was already struggling before Covid hit, thanks to the rise of e-commerce, has seen its decline. It’s not just small malls: The owner of the $ 1.9 billion Mall of America struck a deal with his special service in August to avoid a ban.

Today, a quarter of all CMBS hotel loans are in special services, compared to just 1.9% at the end of 2019. And 18.3% of retail loans are in special services, compared to 5% at the end of 2019. last year.

Residential buildings, on the other hand, are performing well so far. Industry analysts are anxiously watching for signs of a lack of additional tenants now that the initial surge in economic relief included in the $ 2 trillion Care Act passed in March is spraying.

Apartment property owners are also subject to a national eviction ban for non-payment of rent, introduced by the Centers for Disease Control and Prevention last month. The contract does not include funding for rental assistance – in practice, landlords are required to subsidize tenants’ troubled homes until their validity expires on 31 December.

“The worst-case scenario is to take a shiny asset in all commercial real estate and potentially create a liquidity crisis and, frankly, a situation where people are exposed to the streets,” Flood said. The ban on unfunded evictions, he said, “transfers the risk to the borrower and the lender.”

Meanwhile, property owners trying to secure loan relief have problems, especially when the loan is already packaged in a security.

“The difficulty here is that both the borrower and the lender have to determine the value of the asset today,” said Lisa Pendergast, executive director of the Commercial Real Estate Financing Council, a trade association representing lenders, investors and mortgage service providers.

“Where do you think the value of your property will be in three months, six months, six years?” Pendergast said. “It depends.”

Part of the problem is that there aren’t enough commercial real estate transactions – sales fell 68 percent in the second quarter from a year earlier – to assess how real property values ​​have fallen, leaving buyers and sellers with diversifying views on what ownership is. it’s worth it.

The lack of clarity about the current value of a property is especially important for loans diced and packaged in securities held by investors. The bank can give a short-term relief to the borrower and reassess the problem for several months, while the borrower whose loan is packaged in a security has to go through a more complex process to get approvals from various investors to adjust payments.

Special services have to model future payments for bondholders, a difficult task when it is not clear what a building is worth now or whether it will soon generate revenue.

“That’s where everything goes wrong – not knowing the value of a property,” said Michael Bright, chief executive of the Structured Finance Association, a trading group of 370 companies involved in the securitization. “It’s a very important contribution and no one knows.”

A May study by the American Hotel and Accommodation Association found that only 15 percent of borrowers whose loans were packaged and sold to investors received loan relief, compared with 80 percent of bank borrowers.

Think of a hotel owner whose business was doing well before Covid hit. If the owner’s loan is held by a bank, he can draw up, say, a six-month deferral plan or a longer-term bank loan to get things done while there is a vaccine.

But if the loan is sold to investors in the securities market, the owner is ready for full monthly payments, which then servicers forward them to investors. He can work with the deferral service, but investors, depending on how many risks they are exposed to, can be confused.

In the long run, the source of funding does not make much difference – eventually the bank will have to register a property that is not recoverable. And analysts in the industry aren’t sure which properties will do it.

“The main issue is probably about structural economic changes or changes in shopping and living behavior,” Bright said.

“I think everyone is trying to understand what the post-Kovid world means for commercial real estate,” he said. “We hope people want to travel and reunite soon, but we still don’t know.”


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