Garnet Capital Advisors Blog

The commercial real estate market underwent some dramatic and unexpected changes as a result of the COVID-19 pandemic. With millions of people no longer reporting to a physical office space to do their work, the value of those properties declined significantly in many cases. A McKinsey report uncovered that rent prices for commercial spaces in New York City declined by approximately 18% between 2019 and 2022. Commercial real estate loans taken out before the pandemic struck soon became quite distressed. Commercial properties suffered from high vacancy rates and declining rent rates.

Many owners forfeited properties where they were unable to meet debt obligations due to declining income. They sold several trophy properties for amounts less than the build cost in this period. Sales were mostly conducted by nonbank lenders.

Banks predominantly chose to work out loans with borrowers rather than accept low prices from buyers who could not predict where the market bottom was. This has created a disparity in the market. There has been a tremendous amount of money raised to buy discounted commercial loans. However, there is not yet enough supply to meet that demand. That is why it is time for banks to start thinking about selling off some of their distressed commercial loan portfolios while it remains a seller's market for many assets.

Buyers Are Eager for These Loans 

The reality of the distressed commercial loan market has finally seemed to dawn on much of the investment world. Buyers realize they have to modify assumptions to purchase loans and/or properties. Thus, plenty of buyers are lining up to try to buy these types of loans. As any good investor knows, when there is that much appetite for an asset that you are holding, it is likely time to start unloading your holdings.

There are subsets of the market that are particularly troublesome for banks but still have an eager audience. Churches, gas stations, healthcare facilities, and B & C garden apartments are all receiving attention and may be worth considering for sale.

Could Commercial Loans Come Back? 

Some holders might be asking themselves if the commercial loan market might come roaring back at some point in time. After all, it seems like the worst of the COVID-19 pandemic is behind us. Many people returning to the office, and some are questioning if the commercial loan market might come roaring back. Indeed, it appears that the market is getting somewhat healthier. However, this means that the distressed loans are looking more and more appealing to many investors. 

Those investors are placing a bet on the idea that the commercial loan market might stabilize soon. If that turns out to be the case, then those investors might expect to receive a somewhat more stable return on their money. At the same time, they will be taking less risk and will earn less of a premium than before. That is why right now seems like a good time to offload your distressed commercial loans. If things get unexpectedly worse in the commercial real estate place going forward, you will be glad to have lightened up your portfolio of these loans. If things improve in the commercial real estate space, then you will still be glad to have sold off your portfolio at some of the highest prices seen in a while. 

At Garnet Capital, we are here to provide advice about what you can and should do to maximize the returns on your commercial real estate loan portfolios. Our experts keep a close eye on the movements of the market and how those movements are likely to impact the value of your portfolio. If you want to lean in on that expert advice, reach out and contact us today to get started.