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Why Haven’t We Seen Large-scale Distress In Real Estate Following The Pandemic? (Video) – Landlord & Tenant – Leases

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Evelyn Lee: About three years into the pandemic, we have yet to see emergency emerge on a larger scale. People say the reasons for that are different than before the GFC, there wasn’t a lot of overbuilding. There was more conservative lending and there wasn’t – interest rates were low, so the cost of debt was low. So what do you say in response?

Steve Lichtenfeld, PEAR: Not to sound like a therapist but there is a lot to unpack there. To think about what’s happening today, you have to take a step back and say what the pandemic has done to commercial real estate. There were certain macro trends that occurred before the pandemic that were accelerated as a result of the pandemic. What did people sort of do in response? I think that we’ve seen people buy what I call beds. So what were beds? Beds were multi-family and these were single-family rentals. They bought barns, which were industrial self-storage and data centers. And then they bought life sciences because of the demand for pharmaceuticals that was also accelerated by the pandemic. So what were the kinds of losers when you think about some of those things? Some of the losers were – and there is some nuance. Some of the losers were office, but it depends on the office. The class A, highly mediated office performed superbly and really attracted the best tenants. It’s some of the older buildings — the class B, class C — that are having trouble attracting the type of tenants they need. These were central business district hotels only because business travel was reduced. And then there is retail which is clearly affected. So those trends and the distress that you may be seeing is in some of those assets that I mentioned and not in some of the others that have done really well and been a great hedge against inflation.

Vincent Indelicato, Private Credit Restructuring: And I think the constant in some of Steve’s market observations over the last two years has just been uncertainty. And the unpredictability about consumer behavior that this unprecedented pandemic has created, I think on balance has given a lot of investors pause and I think certainly with respect to high quality assets, lenders have tended to offer concessions to sponsors entering into forbearance agreements that I think are only now beginning to to end And so the tendency to just kick the proverbial can or to modify and pretend can change very quickly as those tolerances expire and sponsors, lenders and servicers have very honest conversations about the future of the assets.

Jeff Marwil, Restructuring: There was a lot of forbearance by lenders and landlords during the pandemic period. After that, those sectors started to recover. After the pandemic there were also large increases in house prices and housing starts. So you have asset bubbles I think in at least those two sectors, if not others. And just as the real estate sectors are starting to come back and regulate, the interest rates are going up and they’re going up fast and they look like they’re going to go up very aggressively in a very short period of time. This could harm the ability of those sectors to actually recover. And the interest rate hikes look like they’re going to affect housing because it’s more expensive to get a mortgage now and will continue to be more expensive, and it’s definitely affecting the stock market.

Steve Lichtenfeld: I think what’s happened now is now that we’ve come out of the pandemic — and I like to think that we’re now in an endemic — that people have strengthened their thinking. Well; this is what the world will be today. This is what the world is going to be like for the next, you know, few years. So I think, given the fact that it’s no longer a mystery, that people can now underwrite and evaluate what the cash flow is going to be going forward based on that, and whether they’re thinking more solidly about what they’re underwriting.

Why haven’t we seen large-scale distress in real estate after the pandemic?

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