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3.18.2021

Receiverships in the time of COVID

Being a Detroit-based company with Midwest expertise and a global reach, Farbman is used to being at the forefront of receivership work.  Detroit once was ground zero and still remains home to the foremost experts in repositioning distressed assets. Yet, in a commercial real estate industry where the COVID pandemic has had such a dramatic and variable impact across different industry segments, receiverships are a fascinating example of how even a historic crisis can have sometimes surprising effects.

We are seeing some elevated levels of receivership activity across the Midwest during the last six months, but the pattern might not be in line with what industry analysts and observers were projecting in the early days of the first lockdowns last spring.

What follows is a quick look at the larger Midwest marketplace today, how we got to this point, and what receivership activity might look like in the weeks and months ahead.

Durability and vulnerability

Our own receivership portfolio includes a surprisingly diverse range of assets and product types, including multifamily, office, retail, industrial and hospitality. While segments like retail might not come as a surprise, given how hard-hit so many retailers have been during the last year, it is noteworthy that even some asset classes considered to be fairly strong and resilient (such as multifamily and industrial) are being put into receivership. The question of course is why—and while one-size-fits-all answers remain elusive, it’s clear that the disruption caused by the pandemic can be devastating for some. If a property loses one large tenant (or the only tenant), it doesn’t matter whether or not the larger segment is healthier than expected—that asset will be impacted.

Geographic specificity

Of all Midwest markets, Metro Chicago is by far the one with the most receivership opportunities right now in the Midwest. There is a higher-than-usual amount of geographic diversity right now, simply because some markets or regions (such as Oakland County, Michigan) have put foreclosure moratoriums in place. At the other end of the scale, in Chicago, we are seeing regional banks moving more aggressively to foreclosure—even at a time when many lenders in other markets are still offering forbearance to their borrowers.

Optimism and looming deadlines

Regardless of market-to-market variability, there’s no question that, to-date, overall receivership activity has been significantly lower than anticipated. This far into the cycle, the general consensus was that the impact would be more dramatic. A big reason for that is clearly that lenders are generally being very patient—especially in those cases where defaults are primarily COVID related—allowing more time to turn the asset around and correct the default. PPP funds have also been a big help. Between forbearance and PPP funds, the life of many assets that would otherwise have gone under has been significantly extended. That’s the good news. The bad news is that it seems unlikely that this situation can continue. Despite the optimism associated with vaccine rollouts and the promise of a brighter future in the months ahead, any meaningful turnaround will likely be too late for many, and we could see a real spike in defaults and receivership activity in the next couple of quarters.

Big questions

There’s no question that the pandemic has had a profound impact on the commercial real estate industry. The big questions that tenants and landlords alike have had to ask themselves about what the new post-pandemic normal will look like are going to shape the industry for a long time to come. It’s not just about today’s bottom line, but about the willingness (and necessity) to ask hard questions and potentially make permanent changes in what next-generation office and retail space look like. Today, with continued office tenant uncertainty and so many businesses operating below normal levels, there are already lots of businesses questioning their space requirements. As tenant leases expire and discussions about renewals commence, those questions will need to be answered and things will come to a head. For the moment, some of those questions are being put off, as we’re seeing lots of short-term leases/renewals. That’s better than nothing, but rent rolls with lots of short-term leases might be difficult to refinance, and declining occupancy impacts cash flow and debt service coverage.

The right partner

At a time of such turbulence and turmoil within the industry, receivership professionals with a proven track record and an ability to successfully protect, stabilize, and/or reposition assets to maximize recovery is more important than ever. With such a diverse, market-specific range of localized trends and impacts, operators with a broad Midwest footprint and experience with all asset types will be in demand. Regardless of what happens throughout 2021 and beyond, that expertise and experience will be instrumental in helping to guide the industry’s recovery and transition to a thriving post-pandemic state.

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