2022: The Great Real Estate Reset

Many industries are facing the reality that business will not be as usual post-pandemic.

In hindsight, the pandemic seems to have created short-term unrest in the commercial real estate industry from the standpoint that low interest rates and easy access to capital has kept properties in many asset classes afloat.

Looking ahead, however, rising interest rates, and a possible recession, may create significant turbulence. From our standpoint, there are likely to be several interesting opportunities not seen in a long time.

The reality is many loans residing on bank balance sheets and in CMBS are collateralized by overleveraged assets particularly in office, retail, and hospitality. While many of these loans have been modified and extended, in many cases property operations have not recovered to pre-pandemic levels.

In other words, if the asset’s operations can’t support the loan the basis needs to be reset.

As these loans will need to be disposed of in the coming years, local, entrepreneurial sponsors will seize the opportunity to buy the properties collateralizing these loans at drastic discounts.

At a lower basis, sponsors can then either lease the properties up at deep rental cuts versus the market or redevelop the properties into other uses, such as multifamily or condo.

Multifamily lending will continue to be at the core of ACRES’ lending platform with higher interest rates and constrained supply creating a larger pool of renters. The properties themselves, however, will increasingly come in the form of adaptive reuse of office or hotel properties in gateway cities and other strong locations, rather than via new construction.

As a lender that views all opportunities through an asset management lens, suffice to say that this is the market we’ve been waiting for since 2012.