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The next economic crisis: vacant retail space



Because Donald Trump has made a fortune in the commercial real estate sector, there is also concern that providing significant relief to the industry will be seen as “help to the President’s friends.”

“Sometimes people forget what the depth and breadth of commercial real estate is,” said Mike Flood, senior vice president of commercial and multifamily policy at the Mortgage Bankers Association. “The risk here is people’s ability to stay in apartments and people’s ability to go to work. So unless there are stimulus measures, once we return to normal times, there will be far less things to go back.”

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A major problem is that no one knows how long the decline in commercial real estate will last. Business travel is expected to pick up in at least a year, so the hotel has been hit hard. Although office buildings have not yet been hit by the downturn, the lease period of office buildings is usually longer, and this situation will change as many companies reconsider working from home as a norm.

Since March, the number of commercial loans that have been packaged into securities for “special services” has grown steadily. In this case, non-performing loans are transferred to new managers hired by bondholders to negotiate payment plans on their behalf.

And it’s clear that the virus will continue to reduce revenue for some time, so even those property owners who can share the payment (also due in part to the relief measures now passed by Congress) may begin to decline.

Loss of tenants’ income may trigger a wave of property write-downs and ultimately lead to the loss of mortgages from shopping malls to apartment buildings. But this is not only a handful of wealthy investors, they will be hurt by the widespread write-downs. Eighty-seven percent of public pension funds and 73% of private pension funds hold real estate investments.

Borrowers seeking loan relief or considering refinancing are also in trouble because the uncertainty caused by the virus prevents them from clearly predicting the future source of income for their buildings.

“Every lender is trying to help, regardless of the form of financing, but sooner or later the borrower needs the customer,” Flood said.

This damage has already been shown in the securities market, where mortgage loans are packaged into bonds that are sold to investors and then repaid by mortgage loans.

One-fifth of the loans bundled in commercial mortgage-backed securities are on the Special Services Watch List, where loan servicers (companies that collect mortgage loans and provide them to investors in advance) mark potential barriers to future payments , Such as the main tenant moving out.

Since this crisis has hit some places and industries more severely than others, it is difficult to clearly and largely understand the market’s dilemma. This is the lobbyists’ efforts to convey the urgency to One of the reasons for decision makers. Some assets have been wiped out, while others are booming.

The hotel and retail industries have been hit hardest, and together they account for 40% of the commercial mortgage-backed securities market. A few months after the lock was released, one out of every two hotel rooms remained unoccupied. City hotels with the highest operating costs performed the worst, with an occupancy rate of only 38%.

The retail industry, due to the rise of e-commerce, has struggled before Covid was founded, but its decline is accelerating. This is not only a small shopping mall, it is also the owner of a US shopping mall with $1.9 billion in assets, and reached an agreement with its special service provider in August to avoid foreclosure.

Today, a quarter of all CMBS hotel loans are for special services, compared to only 1.9% at the end of 2019. 18.3% of retail loans were for special services, up from 5% at the end of last year.

On the other hand, the apartment buildings have performed well so far. Industry analysts are anxiously awaiting signs that more tenants are lacking rents because the initial financial relief contained in the US$2 trillion CARES bill passed by Congress in March came suddenly.

Last month, the Centers of Disease Control and Prevention imposed a nationwide ban on evictions without paying rent, which also caused trouble for apartment owners. The order does not include any rental assistance funds and actually requires landlords to subsidize the housing of distressed tenants until December 31.

“The worst-case scenario is that you take away all the glorious assets in commercial real estate and may cause a liquidity crisis. Frankly speaking, this is a situation where people are forced to live on the streets,” Flood said. He said that the ban on evictions without financial support “transfers the risk to borrowers and lenders.”

At the same time, property owners trying to obtain loan relief are in trouble, especially if the loan is already packaged into securities.

“The difficulty here is that both borrowers and lenders need to determine the value of assets today,” said Lisa Pendergast, executive director of the Commercial Real Estate Finance Council, which represents lenders, investors and Commercial service provider’s trade association mortgage.

“Do you think the value of your property will be within three months, six months, six years?” Pendergast said. “This depends on.”

Part of the problem lies in the lack of commercial real estate transactions-sales in the second quarter fell 68% from the same period last year-to measure the actual decline in real estate prices, which makes buyers and sellers view real estate prices very different. The property is worth it.

The lack of clarity about the present value of the property is particularly important for cutting loans into small pieces and bundling them into securities held by investors. Banks can provide short-term relief to borrowers and reassess the problem within a few months. Borrowers whose loans are packaged into securities must go through a more complicated process to obtain the approval of various investors to adjust payments.

Special service personnel must model the future payments of bondholders in a difficult task where it is not yet clear what the value of a building is, or whether it will bring income in the short term.

“This is the root of the whole problem-not knowing the value of the property,” said Michael Bright, chief executive of the Structural Finance Association. The organization represents 370 companies engaged in securitization. “This is a very important input, no one knows.”

The American Hotel and Lodging Association (American Hotel and Lodging Association) found in a survey in May that only 15% of borrowers in loans packaged and sold to investors received loan relief, while borrowing from bank-owned loans 80% of the people received loan relief.

Consider a hotelier who was doing well before the Covid strike. If the owner’s loan is held by the bank, he can develop a six-month payment extension plan or provide a long-term loan to the bank to solve the problem until a vaccine is available.

However, if the loan has been sold to an investor in the securities market, the owner must pay the monthly payment in full, and the service provider will forward it to the investor. He can work with service providers to postpone the payment, but investors may depend on the risk they take.

In the long run, the source of funds does not make much difference-eventually, banks will have to write off unrecoverable properties. And industry analysts are not sure which properties will be.

Bright said: “The main problem may be structural economic changes or changes in shopping and lifestyle habits.”

He said: “I think everyone is trying to understand what the post-Komsomolsk world means to commercial real estate.” “I hope people will travel and gather together again soon, but we don’t know yet.”


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