The bifurcation we’re seeing in the office market between sought-after trophy properties and those with occupancy challenges extends to the realm of distressed real estate as well, said James Shevlin, president and COO of CWCapital. In the second part of a two-part Connect CRE Distressed Assets Update webinar, Shevlin noted that it’s not the Class A properties that have landed in special servicing.
“We’re seeing B and C assets that have heavy capex needs, lower rates in the market, lower occupancy in the market,” he said. “Can we stabilize that asset? We can stabilize the asset, but it’s probably going to be at a much lower valuation.”
To stabilize properties that have become functionally obsolete, “Somebody’s going to have to find a different way to reposition those assets,” said Jenna Unell, VP, senior managing director – special servicing at Greystone. “I don’t think we’ve seen the bottom of those yet. I think there’s more to come on that.”
Not all troubled office properties are lost causes, though. Unell cited the owner of an office property in the Houston suburbs who was determined to make a go of it. The asset “just couldn’t get refinanced, but the borrower wanted to stick with it,” she said. “The borrower paid down principal, put money in reserves to do the TI work, and we put him on a pretty short string and then gave him another option down the road.”
Juan Cueto, managing director, head of real estate (REO) asset management at Rialto Capital Advisors, agreed. “We don’t want to foreclose en masse and take title on everything,” he said. So if you have a committed borrower, that bodes well for the long-term viability of that loan and hopefully it gets back to performing and ultimately pays off.”
Moderated by Sreve Pumper, executive managing partner, asset services and capital markets at Transwestern, the conversation also delved into engineering loan workouts, the challenges of selling at current pricing and how to proceed in a capital markets environment that hasn’t improved as rapidly as people had hoped two years ago. On-demand replays of Parts One and Two of the webinar can be accessed here.
Read More: Webinar: Industry Hasn’t Seen the Bottom of Property Distress Yet
