Arch Companies is anticipating a slow increase in commercial real estate transaction activity as the market digs out from the Covid-19 pandemic. But many of these transactions for properties that are struggling will be quietly shopped, a major break from how business has traditionally been done.
Many firms are not exactly ready to list their struggling properties with brokers, meaning relationships will be key to taking advantage of any perceived distress moving forward, said Jeffrey Simpson, managing partner.
“During these times we’re going to see opportunities through our channels of lawyers and bankers and investors rather than seeing opportunity straight through brokers,” Simpson told REFI US. “I think folks who are struggling are not proud of their situation that they’re in and they’re not really excited to call the biggest brokerage house in the country and say, go put it on your internet and go put it on your website and mass blast it to the world.”
Arch is tracking other changes, with some lenders looking within at their existing loan portfolios and an equal number of equity investors putting their transaction activity on hold for the remainder of the year. The company is also seeing a slower response time from lawyers and other service providers. “Many of the lenders I’ve been talking to have le, their originators been asked to leave or are now workout people,” Simpson added.
None of these work outs are likely to happen quickly. “They are going to take time and each deal is going to be different with different lenders and different equity investors and different managers. Some have to go to court and some don’t. Those are going to happen one at a time at their own pace,” Simpson added.
One of Simpson’s key concerns is future government stimulus packages — particularly the loan-based paycheck protection program that’s been laid out for small businesses. One component of the program was allowed for forgiveness if some of the capital was used for specific expenses, like rent and paying employees. But the program is close to expiring with no replacement service or renewal currently waiting in the wings, he added.
All of this pressure is pushing downward on those still trying to get transactions done in the current climate. Simpson said that in conversations with national brokers, they are saying that deals may not need to close until year-end, an unheard-of proposition for institutional quality commercial assets. “There are plenty of deals that are in contract that have been extended by three, four, five, six months because the sellers don’t want to boost the price. The buyers can’t get the financing,” Simpson said.
Simpson also cautioned that a return to normalcy for commercial real estate will take longer than expected. While optimism pervades conversations, Simpson believes that much of it is unfounded. “It’s a lot of smoke and mirrors,” he added.
By: Peter Benson, REFI US