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“Dealing In Distress” Topic at REFA Luncheon Brings Candor and Consequence

April 30, 2024 — By Michael Walsh

Boston — Typically, at the start of real estate events there is familiar structure and flow, with exchanges of introductions and pleasantries between the moderator, the panel, and the audience - then the conversation segues into the theme before the topic hits its crescendo. Not the case at the Real Estate Finance Association’s luncheon in the financial district, hosted by law firm WilmerHale, on the 26th floor of famed 60 State Street.

Just a few minutes into the packed affair was a moment that would set the tone for a highly engaged, candid deliberation. “I just returned from a major city tour of San Francisco, Houston, Chicago, and New York, and “It’s bad, really bad, and the ‘big brass’ can demand all they want to get people back [to the office] but they won’t,” committed Brock Cannon, Head of National Loan Sales at Newmark. That, said shortly after his introduction, quickly drew the attention of the nearly 200 in attendance at the aptly titled, Dealing In Distress: Finding Value in A Turbulent Market.

Along with Cannon, the panel was moderated by JLL Capital Markets Managing Director, Andrew Gray, and included Michael Olson, Managing Principal of Rhino Capital.

The group opened with discussions on the current affliction in commercial real estate aligning in contrast to the Great Financial Crisis of 2007, being that it is a “real estate led recession.” Gray concurred with the current struggles and scrutiny on liquidity and cautioned the room of the perfect storm that has been brewing over the past four years.

“Nationally, we look at 20% of all loans in the market as being ‘problematic’ and 20% of loans are going to mature this year … yes, borrowing conditions are challenging, and we need transactions - with more distress coming, there will be opportunities to transact,” he added.

When that happens is still a long way off, contends the New York-based Cannon. He forecasts that the worst is yet to come - and what investors have been waiting for isn’t coming at all. “Everyone was prepared with cash to buy distressed and it never came … there are no foreclosures because the government is telling the banks to keep extending, and it’s going to get worse,” he predicts.

Olson agreed with Cannon’s assessment on investor’s aspirations, stating. “they were looking for ‘blood on the street’ and it just isn’t coming … so we’re telling our investors we don’t want ten cents on the dollar and they don’t either.”

Olson attempted to inject some light in an otherwise weighty conversation, insisting, “Boston is insulated from other markets, we’re unique in that companies want to be here and people want to be here - and it’s a competitive, local lending market … but we’re cautiously optimistic,” he conceded.

While Cannon (graciously) agreed with the local private investor as to Boston’s “insulation,” the crowd harmoniously chuckled, as he quickly pivoted back to warn the audience of what he portends. “If this country doesn’t clean up the crime, people aren’t going back to the office.”

The panel shifted to other assets and Olson told of the decline in lab space that had risen to the top of the class over the last few years. “The tenant demand just isn’t there anymore in lab space that it once was.”

The over-development, many on speculative, has seen newly constructed lab buildings opening empty across the region. Add the spike in interest rates and the asset class is enduring its own perfect storm - as owners are struggling to fill tenants in a once-booming life-science industry.

“Ok, I’m trying to be positive,” Cannon joked to the room. “We don’t see as much distress in Boston, however, an interesting trend is starting to happen with multifamily loans transitioning into non-performing loans, especially in rent-restricted loans … eventually they have Capex needs so we’re starting to transition into non-performing assets,” he confirmed.

The elixir to the industry’s upheaval, the panel corroborates, is to stop the extending of loans. “How do we get people back in the [investor] game? Let’s just get these problems flushed through, and stop the extend and pretend,” declared Olson. A sentiment Cannon passionately supported. “This kicking of the can down the road is a real problem - it’s healthy to get this flushed through.”

He then concluded with what may have been his most poignant warning of the day. “I think things are going to get much worse before they get better … people are running out of time with all the dry powder on the sidelines to invest with, and I don’t think we’ve hit the floor yet with low values,” Cannon gloomily predicted.

As to the forthright flow of conversation between the emotional panel of pros, the sense in the room was that the deep discussion could have gone on for another hour regarding the turbulence. “I thought this was excellent … it’s refreshing to hear the truth and opinions from people who are living in it every day,” proclaimed a local developer in attendance.

Andrew Gray Michael Olson Brock Cannon