With the Dow over 30,000 and public commercial real estate stocks rebounding 30%-50% on the news that multiple vaccines are finally in distribution, is it a harbinger of good days ahead or perhaps a dead cat bounce? With so much capital in abundance looking for investment opportunities in a world starving for yield, it is little wonder that it should move quickly into the public markets that were reactively hammered by the investor stampede running from the Covid-19 catastrophe. While the dramatic rise in the stock value of the service companies may bare reasonable prognostication of their post Covid-19 fortunes, the rush into publicly owned commercial office, multi-family, hospitality and retail asset-based companies suggests a very different message. It follows the “Golden Rule” of real estate, which is, “he who has the gold, rules”.
The pandemic is the great accelerator of trends. Like a tsunami washing over the land laying waste to obsolete Class B & C commercial properties, it will also elevate and reward high quality, healthy and purposeful Class A assets. Public companies tend to own the Class A properties and have the “gold” needed to ride out an economic storm and emerge all the stronger for it. The “gold” also enables them to invest in improvements that will restore health, wellness, relevance and purpose in their properties.
Despite the fact that many urban multi-family and commercial office properties, particularly the high rise urban properties, have suffered declines in value of 15% to 30%, few have actually written down these values hoping that a vaccine and a strong balance sheet will lead to a quick recovery. As long as the debt does not come due, or if it does, the lender is lenient, their resilience will likely be rewarded.
The prognosis is less sanguine for properties owned by undercapitalized family offices and private investment groups. Without the capital to refinance at a lower asset value and reinvigorate their properties to compete in a post Covid environment, they will be hard pressed to preserve their equity. As debt comes due their properties fall into special servicing, the options are few. Ownership of a property by a lender (or control by a special servicer) is almost never accretive to value.
The market message is clear, “if you do not have the “gold”, don’t try to make the rules”. Best to monetize and preserve as much “gold” as you can so you’re ready for the opportunities to come.
Corion Enterprises is a boutique commercial real estate investor and advisor with over 100 years of combined principal experience investing in value-add properties throughout greater Los Angeles and advising public and private investors, lenders and servicers on asset resolution and value restoration.
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