May 18, 2020

Loan-Buying Opportunities Remain Few, But Should Increase

By Orest Mandzy
Commercial Real Estate Direct Staff Report

Investors are chomping at the bit to buy loans on the secondary market. But opportunities still remain few and far between.

“Activity is very strong” among investors, said Kingsley Greenland, president and chief executive of DebtX, a Boston loan-sales adviser that has nearly $1 billion of loans on the market for various clients. However, the bulk of that involves foreign assets.

Nonetheless, the company is offering some commercial real estate loans.

“We’re starting to see the first deals go live since the coronavirus,” Greenland said. “That’s a big deal. That means the market is operating.” He explained that the market was relatively subdued in the early part of the first quarter, as is usually the case, and that roughly $150 million of loans traded on the DebtX platform since the beginning of March.

While a big chunk of the loans DebtX is offering are backed by foreign assets or non-commercial properties, it’s offering $160 million of loans on U.S. properties, with at least $13 million of those backed by commercial real estate. And investor interest in those has been “spectacular,” Greenland said. The commercial real estate loans are being offered by a small bank that’s a repeat seller. They’re a mixed bag of performing, restructured and nonperforming loans.

It’s no surprise investor demand has been strong. Investors “have dry powder,” Greenland explained, and “they’re in the business to buy.”

While many expected the pandemic to result in a flood of opportunities, that hasn’t been the case yet. But that should change over time. Banks, servicers and others holding assets that might have been distressed before the pandemic soon should decide to dispose of them as they’re unlikely to recover anytime soon, particularly as a recession unfolds. They’ll then choose to dispose of loans against properties that might face challenges refinancing going forward. Those would include loans against hotels and some retail property types. The sales, Greenland said, won’t necessarily be efforts to improve liquidity, rather they’ll be exercises in balance-sheet management.

CMBS special servicers, for instance, are still actively managing $6.2 billion of so-called legacy loans, meaning they were securitized before the Global Financial Crisis. Many of those are unlikely to fully recover and might be sold in order to make room for what’s expected to be a flood of newer loans getting into distress. Special servicers also manage $17.4 billion of CMBS 2.0 loans, those securitized since the GFC.

Meanwhile, recessionary market conditions have lowered prices investors are willing to pay for loans generally by 5 percent to 20 percent, depending on collateral and its geography, with loans against hotels in the country’s oil patch being the hardest hit. But performing loans against well-located distribution properties, particularly those leased to strong companies, have hardly seen any pricing change.

“We’ll see an increase in volume,” Greenland predicted. “Those who clean up their balance sheets quickly generally recover more quickly.”

Comments? E-mail Orest Mandzy, or call him at (267) 327-4281.