As COVID-19 cases continue to rise across the country, repercussions from the pandemic still reverberate across all industries.
The outcome of millions of lost jobs continues to snowball, leading to lost income, inability to pay rents and mortgages, closures of small businesses and larger companies, and property foreclosures. In the real estate world, the most susceptible property types right now are retail and hospitality, due to the restrictions on shopping and travel, and the focus on social distancing.
So far, 439 commercial mortgage-backed security (CMBS) loans, totaling $21 billion, have been transferred to special servicers during March, April, and May of this year, which is more than the entirety of 2019. Most of these loan transfers are on hotel and retail properties. As the country begins to open cautiously, the hope is that these transfers will slow down, but the future is uncertain with COVID-19 cases spiking in many states who re-opened early.
With nearly 50 years of combined experience, EBI’s Dan Spinogatti and Rich MacAulay have dealt with real estate woes in the past, through both the post-9/11 crisis, as well as the Great Recession. We sat down with Dan and Rich to gather their thoughts on COVID-19, where we are in the current crisis, where we’ve been, and where we’re going.
Q: What are we seeing in the world of CMBS and special servicers right now?
A: (Dan) A lot of companies are trying to preserve cash right now, requiring them to go to their lenders and ask for forbearance. As time goes on, and people in the forbearance stages are still unable to pay their mortgages, we’ll probably see more foreclosures from some companies that were just hit too hard. A lot of areas that rely heavily on hospitality—like Las Vegas and Orlando—are taking a huge hit due to their inability to host conferences and conventions and rely on the hospitality-driven economy.
A: (Rich) Since the start of the pandemic and the quarantine measures instituted in the majority of states until the middle of June,we saw very little activity from CMBS lenders. Over the first two weeks of June,we’ve seen an increase in deals from our CMBS clients, although it’s nowhere near the volume of deals we saw in the first quarter of 2020. In times like this, where most hotels are seeing very low occupancy rates or have made the decision to temporarily shut down, and retail centers have been forced to close due to local guidelines, these businesses/tenants are struggling to pay their rent.
Several of the retail center owners we’ve talked with have indicated that they are doing what they can for their tenants and are averaging 65-70% in rent collections. With decreased income and an uncertain future, we’ve seen and heard of negotiations between owners and their lenders as they try to find the best path forward for the properties and the investors. Various measures, such as interest-only payments, forbearance, and ability to use escrowed funds to keep properties afloat are being utilized.
With CMBS loans that have already been turned over to special servicers at $21 billion, and the pandemic still in full swing, we’ll likely see this number continue to rise. However, the U.S. has seen it before. The financial crisis of ’08 put immense pressure on special servicers, so many hope we’re more prepared this time around.
Q: How is EBI equipped to aid and assist special servicers during and after this pandemic-inspired shift within the CMBS lending world?
A: (Rich) In 2008 and 2009, special servicers were hit with a tidal wave of non-performing loans; the consensus this time around is that it won’t be as bad, but time will tell. In the last recession, with a limited path forward on certain properties, the keys were being turned over to special servicers at an overwhelming pace. The hope this time around is that short-term relief will allow owners to work with their special servicer to avoid foreclosure and get properties back on track as the economy recovers. In the financial crisis of ’08, we were able to pivot from EBI’s main client pool—traditional lenders—to serve special servicers, taking on the responsibility of comprehensive due diligence, including pre-foreclosure assessments, for upwards of 10,000 properties of all types nationwide.
When special servicers are left with the aftermath of a foreclosed property, the due diligence approach needs to be conservative, efficient, and thorough to set the special servicer and investors up with the information needed to make the best possible business decisions. Our ability to adapt to a similar crisis a decade ago sets us up with the knowledge and experience to be able to be of even more value this time around. Based on past experience, the systems we have in place, and many of the same staff who experienced the Great Recession, we are in a position to confidently deliver the most comprehensive assessments to aid special servicers or banks when they’re plotting the path forward on a foreclosed asset.
Q: Where do you see the road we’re on right now taking us?
A: (Dan) It’s tough to say; transitionary markets come with uncertainty. People are trying to keep their current properties afloat and avoid foreclosure. I’m optimistic and am looking forward to the economy moving back towards more normal operation, but we’ll have to see how things shake out as people work through forbearances and foreclosures
While we can’t predict the future state of the economy or the current pandemic, we can control our responses and reactions to uncertain times. Making sure special servicers are equipped with the information they need to move forward with foreclosed properties is where EBI comes into play. Our expert consultants have been there for our clients in previous economic downturns; and getting them the best information in complex times remains our number one goal.