Opportunistic real estate investors anxiously waiting for a wave of distressed real estate to hit the market are likely going to have to wait a lot longer than they imagined.
It's true that the coronavirus pandemic pushed our economy into turbulent waters and no doubt a period of recession; however, the result of this unparalleled time is not the same flash of distressed sales we saw in the Great Recession. Instead, we're seeing a slow and gradual adjustment of the current market supply and demand, pushing the value and pricing for certain assets down and others up.
In order for real estate values to come crashing down, market demand needs to be displaced. Right now, real estate values in many markets, particularly for single-family homes and residential housing, are on the rise. Low inventory, historically low mortgage rates, and high demand are creating the perfect storm for prices to increase, not decline.
A new recession brings a different class of distressed real estate
But not all markets and asset classes are being affected in the same way. Certain commercial real estate sectors, like hotels, retail, and some office space, have seen a complete 180 when it comes to demand. Sudden and sharp declines in the ability for tenants to pay their leases or to operate their businesses at all have been a major cause for alarm, resulting in a lack of demand and decreased values.
The reality of millions of Americans suddenly becoming unemployed sent shockwaves through the mortgage industry. Distressed debt buyers, or real estate investors who invest in nonperforming mortgage loans, looked at the crisis and assumed there would be a surge of defaulted paper hitting the market as rising mortgage delinquencies put pressure on the banking and financial system. However, quantitative easing, among other federal interventions like additional unemployment benefits, forbearance plans, stimulus checks, and other federal support, has provided borrowers, tenants, and financial institutions with the support they needed to keep distressed sales from skyrocketing.
Large and small investors are sitting on the sidelines waiting for the doors to open and the flood to commence, but it's unlikely it will happen across the board as it did between 2008 and 2012. As of April 2020, Prequin, a provider of data and analytics, found that in the private equity and venture capital space, there was $1.48 trillion in dry powder, which is committed capital from investors that is currently unused by the firm. There is a lot of money sitting idle right now. While prices for distressed asset classes aren't near rock bottom, they are on the decline, and certain investors are taking advantage of lower values and higher cap rates in the markets that have been hit the hardest thus far.
While its likely more distressed real estate will slowly hit the market, new policies could determine the type of distressed real estate that becomes available, potentially stopping some of it altogether. Investors waiting for distressed real estate need to be in this for the long haul and seeking opportunities in the present moment, which could be utilizing adaptive reuse of lower-valued commercial real estate or approaching illiquid investors who cannot ride out the storm. Policy makers have made it clear that further aid is on the way in some form or another. Depending on the depth and type of aid, it's unlikely that distressed buyers will be met with the opportunity they were expecting.