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The commercial real estate market have been completely devastated. Commercial real estate buildings’ value remains extremely depreciated and with many businesses are right at the brink of bankruptcy, such properties may face foreclosure pretty soon. In fact, a recent Bloomberg analysis has exposed that at least $146 billion in distressed commercial property is in some sort of financial purgatory, as investors decide which ones are worth saving and which ones will die. In the hospitality sector, U.S. malls have accumulated so much debt that they’ve lost 60% in value up until this point. While hotels have been registering vacancy rates of up to 80%, and restaurants are closing by the thousands every day. However, commercial office is being considered the biggest loser, with more and more companies choosing to cease their entire office operations for good. As many determinants are still unfolding, the worse might be yet to come for the commercial real estate sector. And that’s what we’re going to investigate in this video.
The widespread distribution of vaccines and rallying financial markets are signaling that the health crisis might soon be gone, however, according to a recent Bloomberg analysis, the worst is yet to come for commercial properties. The fallout of the sanitary outbreak has pushed about $146 billion of commercial real estate into distress, serious risk of bankruptcy or default at the end of 2020, mostly concentrated in hotels and retail.
It’s safe to say retail and hospitality were two of the sectors most widely impacted by the outbreak. As a result, hotel vacancy rates soared to 80% all across the country, and for the first time, Americans had to confront the idea that retail and hospitality businesses were inevitably disappearing. As such businesses depend upon foot traffic to exist, the new restrictions severely compromised their revenue and, therefore, impacted their ability to meet their rental payments.
Consequently, landlords started to fall behind on their mortgage loans, and although lenders repeatedly extended credit and the forbearance period, many of them are already losing patience after months of accumulated debt. The special servicing rate is at 9.72% for the overall market, but almost a quarter of all hospitality loans and 17% of retail loans are at risk of becoming delinquent. “We have tons of stuff that’s in purgatory,” said Manus Clancy, a senior managing director at Trepp.
With nearly $430 billion of commercial real estate debt coming due this year, investors who profited from the current market rally are essentially the ones who can either save or let such properties face foreclosure and die. Even Fed Chair Jerome Powell told Congress that he is worried and is keeping an eye on the sector, as more bankruptcies are being filed with each passing day, which means more real estate is pushed to the brink of foreclosure. However, most properties never make it to Chapter 11. That is to say, commercial real estate prices can face a major crash as owners have to find a way to renegotiate their debt, and to do so, they will be forced to sharply drop property prices to be able to find investors willing to cover their mortgage loan debt.
More than $4 billion in value was lost across 118 retail-anchored properties with commercial mortgage-backed securities debt after a recapitulation was performed. Shopping malls have suffered the acutest decline in value, plunging an average of 60%, and less than half of the 1,100 U.S. indoor malls have a real chance of survival. But the sector raising the most concerns is commercial office. Commercial office buildings in most of America’s business epicenters are now financially collapsing way faster than malls. Landlords are about to face enormous losses as thousands of companies aren’t renewing their leases this year, leaving tens of millions of square feet of office space empty.
With so many sectors of the economy crumbling at the same time, commercial real estate is set for a prolonged collapse, regardless of the reopening and the distribution of a vaccine. The truth is that once economic activity is resumed what we will actually find is an empty scenario, as our businesses’ lives were left in the hands of profited-oriented investors, whose worry is to save big businesses and big properties. For months, business owners and landlords have been pledging Congress for help but their pleadings were left unheard. Now, this is what we get. And as you can probably assume, the toll of letting numerous companies be ruthlessly wiped out will be translated into a lot more economic pain in the months ahead.
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