NYC Finance Webinar: Navigating Distress And Solving For Maturing Loans Before ‘The Clock Is Up’
With nearly $1T worth of commercial mortgages coming due through the end of this year and another $2.2T reaching maturity by the end of 2027, the market continues to struggle with how to best navigate the here and now and what's on the horizon.
Falling property values and increased operating and interest expenses over the past two years have led to the rapid rise of delinquent commercial loans. Problems in commercial real estate have been painful for the credit market, and the pain has spread to the bond market as well.
Coupled with recessionary fears and elevated expenses, it begs the question: What will happen to important commercial real estate markets such as New York City where asset classes like office and multifamily have faced a surge of challenges?
At Bisnow’s New York Finance Webinar on March 28, panel speakers came together to discuss navigating distress and solving for maturing loans.
Robert Malatak, a partner at law firm and webinar sponsor Windels Marx, moderated the discussion. Malatak focuses on a range of complex commercial disputes that leverage his experience in litigation and bankruptcy. He also has experience in workouts of distressed commercial loans and enforcing judgments against judgment debtor’s assets. Prior to private practice, he was a certified public accountant at Deloitte, bringing unique business experience to his practice.
Malatak opened the conversation by asking the speakers to describe the state of CRE in New York City.
Albert Schmool, managing director and head of New York acquisitions at Tishman Speyer, said the entire market is in a state of flux.
One roadblock is the wide bid-ask spread on valuations of buildings, he said. While this spread has been closing and is expected to continue to narrow as time goes on, elevated interest rates and a complex regulatory environment have added further complications.
Some asset classes are more prepared to handle these challenges than others, particularly those with strong demand drivers, Schmool said.
“People talk about how multifamily and industrial are better positioned to navigate the market, and while that’s certainly the case, even the ideally located and newer products in that space are dealing with rate issues,” he said. “For those facing additional questions of demand, such as buildings located in secondary or tertiary locations, the bar is higher to clear these challenges.”
Jamie Thomas, deputy general counsel at Santander, agreed that the CRE market has been unpredictable in recent years. Thomas said there has been a disconnect between how people expect the market to perform and what is actually happening.
“There's a lot of expectation for negative events to occur that so far haven't, especially with office space,” she said. “At this point, it seems sort of inevitable that [office] will reduce in value.”
While the office sector is clearly going through a period of difficulty, multifamily, once the city’s sweetheart asset class, is also experiencing a wave of struggles because of state rent laws passed in 2019, said Greg Corbin, president of Northgate Real Estate Group. For further information on these laws, see here.
The Housing Stability and Tenant Protection Act keeps more units under rent stabilization and reduces a building owner’s ability to increase rents upon lease renewals and in between tenants. Corbin said that this made property values drop nearly overnight, anywhere from 20% to 30%. Coupled with the onset of the pandemic and the country’s subsequent economic downturn, a sentiment of uncertainty remains throughout the sector, he said.
Malatak pivoted the conversation to distressed assets, asking panelists what strategies owners are deploying to deal with these properties.
Corbin is seeing owners ask lenders for a reduced payoff. However, banks aren’t always sympathetic to this request, especially in a tight-knit community like New York City, where word can spread fast. More often than not, banks would rather restructure debt than offer discounts, he said.
“Alternatively, we have a lot of borrowers that have decided that Chapter 11 is the route to go to stop a foreclosure auction,” Corbin said. “A lot of times it happens within a few days of the foreclosure auction that they realize the clock is up and it's their only option. There are a lot more Chapter 11 filings that we've been seeing and a lot more on the horizon.”
Eloy Peral, special counsel at Windels Marx, added that declaring bankruptcy not only benefits the borrower — the lender may benefit as well.
“Bankruptcy is certainly not a zero-sum game under the right circumstances, and depending on what you negotiate, it gives the lender a lot of control,” Peral said.
If a property goes into foreclosure, it is contested as a two-party dispute. But the bankruptcy system can align the interests of both parties, potentially maximizing the value of the asset, Peral said. Other upsides to the process include fewer costs associated with transferring the property and more flexibility in terms of negotiating the debt structure.
Refinancing is another viable exit strategy, Malatak said, asking panelists whether they are seeing borrowers refinance or if it is too expensive in today’s environment.
Thomas is seeing plenty of refinancings but said there are fewer places to source capital. The pool of large lenders, especially in New York City, that can do midlevel multifamily loans is dwindling. But there are a lot of other types of capital out there, she said.
“There really is sort of this hierarchy of lenders,” Thomas said. “There's often money available, though, and it's more of an issue of where it's coming from, the underwriting standards and what type of creditor you end up with.”
Malatak closed the webinar with a question that is plaguing the industry this year: Will the Federal Reserve’s rate cuts have a material impact on the banking side of CRE, if they come to fruition?
Corbin said that the three rate cuts the Fed is hinting at before the end of the year are already baked in for the most part, with people expecting them to occur. He added that the Fed typically follows through with what has been predicted.
“I think if rates drop, it will definitely have an effect on pricing,” he said. “People that are cap rate buyers will be able to pay a more aggressive price if they’re borrowing at cheaper money. It doesn't trade exactly in tandem, where if rates were to go down a point and a half, someone would now pay a 6.5% cap rate whereas they wanted an 8% cap rate. There's definitely correlation, however."
Although people are expecting these rate cuts to happen over the next few months, Schmool said, it's not going to solve everyone's problems magically.
“[Rate cuts] will absolutely help, and for those properties that are doing well from a profitability perspective, that are only challenged by rates, it will help them more than others,” he said. “But there are still other challenges to unwind and disentangle that, I think, 75 basis points or 50 or 100 basis points are not going to allow us to paper over.”
Panelists’ predictions for the timing of rate cuts may ring true, Malatak said.
Although the Federal Reserve didn't lower interest rates at its last meeting, Fed Chair Jerome Powell said “a reduction in our policy rate could be on the table as soon as the next meeting in September.” Powell stressed, however, that the Federal Open Market Committee has made no decisions about future meetings.
Many industry experts anticipate rate cuts sooner than later given the heightening recession risk. When rate cuts ultimately arrive, it remains to be seen how effective they will be in mitigating the damage to the commercial real estate market, Malatak said.
Connect with Rob Malatak at rmalatak@windelsmarx.com or on LinkedIn.
This article was produced in collaboration between Windels Marx and Studio B. Bisnow news staff was not involved in the production of this content.
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