By Konrad Putzier and Peter Grant
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (April 8, 2020).
A growing number of property investors are preparing for what
they believe could be a once-in-a generation opportunity to buy
distressed real-estate assets at bargain prices.
Investment firms like Blackstone Group Inc., Brookfield Asset
Management and Starwood Capital Group are sitting on billions of
dollars in cash and capital commitments they have raised from
pensions, sovereign-wealth funds and other big institutions in
recent years.
Many of these firms are eyeing hotels, retail properties,
mortgage-backed securities and other assets that have come under
stress in recent weeks as the spread of the coronavirus pandemic
has closed businesses across the country, leaving them unable to
pay rent and their landlords unable to pay their mortgage
bills.
Despite the continuing uncertainty and economic destruction, the
current environment presents the sort of circumstances that
risk-taking property investors say can make a career. And while
investors are in it for the profit, they also say their investments
may help the market bounce back and stabilize property prices.
"There are people that do have dry powder, like us, and that
will recognize this as one of the greatest buying opportunities of
the century," said Daniel Lebensohn, co-founder of the investment
firm BH3, which launched a $100 million distressed-debt fund in
late 2018.
Commercial real-estate prices in the U.S. more than doubled over
the past decade, according to Real Capital Analytics, leading many
investors to conclude that the market had settled near a peak and
so afforded few obvious buying opportunities. Now, many of these
assets could soon hit the market as lenders and desperate landlords
look to raise cash.
It has been mostly a trickle so far because property markets
move slower than bond markets. Mortgage defaults have been few.
Investors expect that to change over the coming weeks and months.
Once a borrower defaults, the lender often chooses to sell the loan
at a discount to avoid the hassle of a lengthy foreclosure
lawsuit.
Some of the first distressed assets to hit the market have been
mortgage-backed securities held by real-estate investment trusts,
which are facing margin calls from their banks. The Royal Bank of
Canada last month sought bids for $600 million in mortgage debt
that it seized from clients.
Distressed hotel debt and properties could be next, even though
"there aren't a lot of deals to talk about yet," said Daniel Peek,
president of the hotel group at brokerage Hodges Ward Elliott. He
gets "20 calls a day" from firms looking to buy distressed
hotels.
Many investors believed in 2008 that the fallout from the sudden
collapse of Lehman Brothers Inc. would make for the best bargain
hunting of their careers. Commercial property prices fell by 35%
between August 2008 and June 2010, according to Real Capital
Analytics, but recovered in the following years.
But some of the same investors expect a worse downturn now and
more immediate distress. The previous crisis started in financial
markets and gradually spread into the real economy. Property owners
had trouble getting new loans from skittish banks, but most tenants
still paid rent, meaning landlords were able to keep paying their
mortgage bills.
This time, the sudden shutdown of vast parts of the U.S. economy
is leaving landlords with less rental income, and many may well
default on their mortgages this month.
Investors concede there is a risk, and they won't be pouring all
their money into distressed assets. Prices could remain depressed
for a long time, and there is always the danger of buying too
early, before the market bottoms out.
Still, there is plenty of money waiting to pounce. In December,
private real-estate funds that focus on opportunistic and
distressed-asset investments held $142 billion in dry powder,
according to Preqin -- up from $94 billion in December 2008.
Greystone & Co., a New York-based real-estate firm, is
raising a fund with up to $400 million to buy distressed debt.
"There's not much liquidity in the market so prices are getting
cheaper and cheaper," said Greystone CEO Stephen Rosenberg.
Directed Capital, a St. Petersburg, Fla.-based investment firm,
bought about 15 loans involving about a dozen different borrowers
from a bank late last month. The loans had a face value of $10
million, but Directed Capital only paid about $7.4 million,
according to CEO Chris Moench.
Other investors had already begun raising money, leaving them
well positioned to bargain hunt now. Blackstone finished raising
the largest commercial real-estate fund ever in September, with
$20.5 billion in commitments. The company also has a $7.1 billion
Asia-focused opportunistic real estate fund and is approaching the
close of a $10 billion Europe-focused fund. Brookfield Asset
Management raised $15 billion for a fund that closed last year.
Fortress Investment Group, whose real-estate funds have around
$3 billion in cash or cash commitments, was already buying up
defaulted mortgages before the virus spread, according to people
familiar with the matter.
David Schechtman, a broker at Meridian Capital Group, predicts
that bankruptcy auctions in the property market will become a
regular occurrence. He said he is currently marketing a handful of
distressed assets for sale, including an unfinished luxury
condominium in Manhattan.
"Our thoughts and prayers are with all of our fellow Americans
and nobody wants to capitalize on anybody's misfortune," Mr.
Schechtman said. "But I will tell you, real-estate investors --
when you take the emotion out of it -- many of them have been
waiting for this for a decade."
Write to Konrad Putzier at konrad.putzier@wsj.com and Peter
Grant at peter.grant@wsj.com
(END) Dow Jones Newswires
April 08, 2020 02:47 ET (06:47 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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