Taking Clues from Past Cycles
While this is the first global pandemic that this generation must deal with, according to Lee Menifee, PGIM Real Estate’s Head of Americas Investment Research, believes that there are things we can learn from history. “The thing that I’m looking most carefully at is how real estate is priced, both in an absolute sense and versus other asset classes, in this downturn relative to previous downturns.” In the past, real estate values fell for two reasons: higher risk of certain properties and reduction in cash flow. “The underlying incomes fall, and the value of the assets should fall, but we’re not sure that we’re going to see a lot of cap rate compression,” Menifee says. “We’re not sure that the risk premium line up. That’s true in the residential sectors and in the industrial sector.”
With regards to distressed investments coming to the market, Menifee doesn’t “see a lot of pressure on sellers, either from their balance sheets or the lenders, to force a sale. There obviously will be a few sales, but I think that’s going to be slow to evolve. To the extent that you have cash flow, the lower rate environment helps there.”
Banks Stand to Lose $48B On CRE Loans
The Federal Reserve’s latest stress test, mandated by the Dodd-Frank Act of 2010, revealed that the largest U.S. banks might lose up to $47.6B on commercial real estate loans over the next two years. This would be the result of a worst-case scenario, characterized by GDP contraction of 10%, unemployment of 10% in 2021 and the Dow Jones Industrial Average losing all its gains since 2014. The banks being most exposed to this risk are: Wells Fargo & Co. at $10B. Bank of America Corp. and JP Morgan Chase & Co. would lose $4.9B and $3.8B, respectively, and Truist Financial Corp. would lose $3.3B.
CMBS Delinquency Rate Skyrockets to Over 10% in June, Just Shy of All-time Record
The CMBS delinquency increase by 317 basis points from May to June to 10.32%. This number is just slightly short from the all-time high of 10.34% in 2012. As a comparison, last year, the delinquency rate was only 2.84%. According to Trepp, this number could grow further, given that 4.1% of loans missed the June payment but remained less than 30 days delinquent. Not surprisingly, the lodging and retail sectors make up the largest part of the delinquent loans. Office, multifamily, and industrial, on the other hand, show delinquency rates of 2.66%, 3.29% and 1.57% respectively.
WeWork Terminates 115,000-SF Lease at 149 Madison Ave.
The co-working firm has terminated its full-building lease at 149 Madison Ave that was agreed to be taken in 2018. The firm has never moved into the 115,000 SF boutique office building and the owner, Columbia Property Trust, has now taken over the property, including all improvements, done by WeWork. According to the two firms, their other lease agreements in San Francisco and Washington DC will continue.