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The next economic crisis: Empty storage space

There are also fears that directing significant relief to the industry would be seen as a “handout to the president’s friends” since Donald Trump earned his fortune in commercial real estate, a lobbyist said frustrated by the lack of traction the issue gets with politicians.

“Sometimes people forget the depth and breadth of what commercial real estate is,” said Mike Flood, senior vice president of commercial and multi-family policy at the Mortgage Bankers Association. “What is at stake here is both the opportunity for people to stay in their apartments and the opportunity for people to go to their jobs. So unless there is a stimulus, there is much less to return to when we return to normal times. ”

A major problem is that no one knows how long the decline in commercial real estate will last. Business travel is not expected to pick up again for at least a year, so hotels are hammering. And while office buildings have not yet felt most on the downturn ̵

1; offices tend to have long leases – that will change as many businesses rethink the way they work when work from home becomes the norm.

The number of commercial loans wrapped in “special services” securities – where emergency loans are transferred to a new manager hired by bondholders to negotiate a payment plan on their behalf – has risen since March.

And it has become clear that the virus will continue to cut revenue for some time, so that even the property owners who have been able to patch up payments – thanks in part to now-defunct emergency measures passed by Congress – can begin to slip.

The loss of paying tenants could affect a wave of property write-downs and possible foreclosures on everything from shopping malls to apartment complexes. But it is not just a pocket of wealthy investors who will be hurt by extensive write-downs. 87 percent of public pension funds and 73 percent of private pension funds have real estate investments.

Borrowers seeking loan relief or considering refinancing also run into problems as the uncertainty caused by the virus has left them without a clear projection 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 emerging in the securities market, where mortgages are packaged in bonds sold to investors, which are then repaid through payments on the mortgage.

One in 5 loans collected in commercial mortgage securities is on special service lists, where lending companies – the companies that collect mortgage payments and pass them on to investors – mark potential obstacles to future payments, such as a larger tenant moving out.

Because the crisis has hit some places and industries much harder than others, it is difficult to get a clear and large picture of market problems – one reason why lobbyists have struggled to convey pressure to politicians. Some assets are wiped out while others thrive.

Hotels and retail, which together account for 40 percent of the commercial mortgage market, have been hardest hit. Months after locking, 1 in 2 hotel rooms is still available. Urban hotels that have some of the largest operating costs perform the worst with only 38 percent occupancy.

And retail, which was already struggling before Covid broke through thanks to the rise in e-commerce, has seen its decline accelerate. It’s not just small strip malls either: the owner of $ 1.9 billion. Mall of America entered into an agreement with its special services in August to avoid foreclosure.

A quarter of all CMBS hotel loans are in special service today compared to just 1.9 percent at the end of 2019. And 18.3 percent of retail loans are in special service, up from 5 percent at the end of last year.

Apartment buildings, on the other hand, have performed well – so far. Industry analysts are eagerly looking for signs of additional tenants missing rents now that the initial spurt of financial relief included in the $ 2 trillion CARES Act Congress passed in March has erupted.

Apartment property owners are also hampered by a nationwide ban on deferred rent payments introduced by the Centers for Disease Control and Prevention last month. The order did not include any funding for rental assistance – which actually required landlords to subsidize struggling tenants’ housing until it expires on December 31st.

“The worst case scenario is that you take the shiny asset in all commercial real estate and potentially create a liquidity crisis, and quite frankly, a situation where people are put out on the street,” Flood said. The unfunded waste ban, he said, “transfers the risk to the borrower and lender.”

Property owners who try to secure repayments on their loans, meanwhile, have problems, especially in cases where the loan is already wrapped in a security.

“The difficulty here is that both the borrower and the lender need to determine what the value of the asset is today,” said Lisa Pendergast, CEO of Commercial Real Estate Finance Council, an industry association representing lenders, investors and service providers. of commercial mortgage.

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

Part of the problem is that there have not been enough commercial real estate transactions – sales fell by 68 percent in the second quarter from the year before – to measure how far property values ​​have really fallen, leaving buyers and sellers with wildly different views on what a property is worth.

The lack of clarity about the current value of a property is especially important for loans that are divided and aggregated into securities held by investors. A bank can give a borrower short-term relief and reassess the subject in a few months, while a borrower whose loan is wrapped in a security has to go through a more complex process to get different investor approvals to adjust payments.

Special service companies 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 bring in revenue.

“This is where it all breaks down – without knowing the value of a property,” said Michael Bright, CEO of the Structured Finance Association, a trading group representing 370 companies involved in securitization. “It’s a pretty important input, and no one knows.”

A May survey by the American Hotel and Lodging Association found that only 15 percent of borrowers whose loans had been packaged and sold to investors had received relief from their loans compared to 80 percent of borrowers with bank-owned loans.

Consider a hotel owner whose business went well before Covid struck. If the owner’s loan is owned by a bank, he can work out, e.g. A six-month plan for deferred payment or a long-term loan with the bank to tide until there is a vaccine.

However, if the loan is sold to investors in the securities market, the owner is on the hook for full monthly payments, which the service companies then pass on to the investors. He can work with deferred payment services, but investors may depend on how much risk they are exposed to.

In the long run, the source of financing does not make much difference – in the end, a bank will have to write down a property that does not recover. And industry analysts are not sure which properties will.

“The main issue is probably around structural economic changes or shifts in shopping and life behaviors,” Bright said.

“I think everyone is trying to understand what a post-Covid world means to commercial property,” he said. “Hopefully people will travel and gather again soon, but we don’t quite know yet.”

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