Part 1: Distressed Realities
Distress. A word thousands of Commercial Real Estate (CRE) investors have been whispering quietly and hopefully to themselves for the past half-dozen or so years. But what is it about such a gloomy word that has stirred so many CRE investors into such a frenzy? It is because, at last, the time for distressed-asset buying is upon us! The world economy just smashed into a brick wall, and soon lenders will be kicking down thousands of CRE investors’ doors demanding the keys to their properties! Right?
Well, not so fast. In fact, there are several realities that make me wonder if most of us will be able to get our hands on heavily discounted buying opportunities. Perhaps the post-COVID, CRE blue-light specials will be about as common to the average investor as K-Mart stores in 2020.
Why Do I Believe This Could Be True?
First, despite a sizeable global calamity, there remains an enormous amount of capital sitting anxiously on the sidelines, waiting to be called in to the game.
In fact, in his April 21, 2020 Wall Street Journal article, “Cash Pours Into Distressed Real-Estate Funds as Investors Aim to ‘Play Offense,’” Peter Grant wrote, “in early April there were 939 commercial-property funds globally raising money—a record—and they were targeting $297 billion.” Grant then added, “the opportunities have materialized so quickly that firms are raising cash at a pace that would have been inconceivable before the pandemic erupted.”
Yet, is it also inconceivable that investors’ immense appetite for distress will once again inflate CRE prices—even for distressed properties?
Second, while the amount of available private capital is staggering, it is dwarfed by the monumental amount of government-induced liquidity pouring into the economy. Along with this are several pieces of legislation being introduced to provide a safety-net to a large number of troubled real estate borrowers. Of course, there are other market influences and regulations which will certainly force the issues of fire-sales and foreclosures, but will the government’s financial pain-management strategies materially reduce the supply of would-be distressed assets reaching the market?
My point is not to question the competence of fund managers with billions of dollars of fresh dry powder. But as many of us have experienced, once capital pivots toward an opportunity, the opportunity tends to vanish.
If you are among those planning to buy distressed commercial real estate, we’d love to have your feedback on this. Do you believe distressed CRE deals are around the corner, or will hedge funds and government intervention keep buying opportunities to a minimum?
Post-COVID CRE Support
As always, Acquisition Consultants’ objective is wealth creation through sound investments in commercial real estate. We gladly use our resources to support organizations that offer hope and restoration to our community and the world.
Please feel free to contact any of our team members. We’d love to discuss how we can help you reach your CRE investing goals.