Navigating Distressed Commercial Real Estate
GP How-tos
It’s Time to Take a New Approach to Distressed Commercial Real Estate
The challenges facing the industry over recent years are beginning to mount in the form of distressed commercial real estate. These are assets that are in bankruptcy, default, court administration, liquidation, significant tenant distress, or those with commercial mortgage backed securities (CMBS) that have been transferred to a special servicer.
Nearly $64 billion in assets were classified as distressed at the end of Q1-23, and an additional $155 billion are approaching distressed status. Within these, the retail and office asset classes are facing the greatest difficulty. In the office class, many commercial owners are defaulting on or walking away from mortgages, leading to a surge in delinquency and potential for significant losses for investors in the $1 trillion market of securities backed by those mortgage payments.
Despite these downturns, GPs should not become inactive and instead seek opportunities for improvement and innovation with distressed commercial real estate and beyond. By exploring new options and maximizing value and efficiency, GPs can enhance team performance and benefit the investors who rely on them. Here, we’ll explore a few recommendations for GPs who either already own specific asset classes or are looking outside of them.
1. Innovate Office Assets to Make Them More Appealing
Office assets have been struggling since the pandemic, and while a few years have passed, it’s clear that work-from-home isn’t going anywhere — resulting in many offices becoming distressed due to low tenancy. GPs should consider alternative avenues to making these assets useful for tenants and thus attractive for investors. Examples include:
- Rethinking office assets so that they help employers retain top talent
- Capitalize on regional trends to attract talent and local preferences
- Attracting disruptors and innovators to subsequently attract more tenants
- More effectively navigating the deal process to add value for investors sooner
2. Focus on Investor Value Creation
Whether it’s an office asset, a retail location, or a supporting industrial facility, the key to the success of your deal is funding. While most commercial real estate leans on debt, getting lenders on board is becoming more challenging and expensive. That means firms are relying on investors more than ever to get the deal across the finish line. Key considerations for getting more investors aboard and winning their commitments include:
- Creating digital assets for investors to review anywhere
- Centralizing and automating the capital call process
- Handling quarterly distributions via an automated system
- Providing a portal and reporting system for investor self-service
- Prioritizing clear, effective, and helpful communication to investors
What Tools Are You Using to Make This Time Easier?
While much remains to be seen with distressed commercial real estate assets and the industry overall, one thing remains clear: you and your team have no room for inefficiency or lost time. Speed to impact is more crucial than ever, which is why it’s time to consider using tools designed to help you cut out excess and hassle.
At Covercy, we’ve built the first real estate syndication platform where banking meets investment management. With capabilities spanning investor relations, fundraising and capital calls, automated distributions, and banking, virtually everything needed to manage the process of winning deals, funding them, and managing them post-close can be done in a single system. This saves you and your team significant time and resources, allowing you to focus on what you do best: closing deals and growing your investor relationships.
