{"id":1004711969,"date":"2024-05-01T11:53:49","date_gmt":"2024-05-01T19:53:49","guid":{"rendered":"https:\/\/www.commercialsearch.com\/news\/?p=1004711969"},"modified":"2025-03-26T10:06:42","modified_gmt":"2025-03-26T18:06:42","slug":"economists-view-distress-opportunity-awaits-or-does-it","status":"publish","type":"post","link":"https:\/\/www.commercialsearch.com\/news\/economists-view-distress-opportunity-awaits-or-does-it\/","title":{"rendered":"Economist’s View: Distress Opportunity Awaits\u2014Or Does It?"},"content":{"rendered":"\n

In today\u2019s environment of dislocated capital markets and an inverted yield curve, signs of financial distress are widespread. But whether that translates into a wave of investment opportunities is questionable. In fact, it seems unlikely. Instead, a lot of loans will be \u201ckicked down the road\u201d.<\/p>\n\n\n\n

\n
READ THE DIGEST<\/strong><\/a><\/div>\n<\/div>\n\n\n\n

In 2023, 441 securitized loans, totaling $13.6 billion, were modified, up from about 380 loans modified in 2021 and 241 in 2022. From 2024-2025, about $270 billion of CMBS collateral, across the major property sectors, will mature.<\/p>\n\n\n\n

Sam Zell frequently said that investors say they wish they were around for the distress that existed from 1973-1976, 1980-1983, 1990-1995, after 9\/11, and 2009-2013. He always laughed and said that in fact when such distress appears, most investors are too frightened to act. This has largely been the case over the past 18 months, as indicated by plunging transaction volumes. The reason is always: \u201cDeals don\u2019t pencil.\u201d But in each of those episodes, a patient and well-capitalized investor was handsomely rewarded on deals that were hard to pencil at the time.<\/p>\n\n\n\n

\"Image
Image by ferrantraite\/iStockphoto.com<\/em><\/figcaption><\/figure>\n\n\n\n

Deal volume is running about 20 percent of normal. This is despite the availability of nearly $300 billion in dry powder at private equity shops, with more at sovereign funds, pension funds, and about $3 trillion in excess bank reserves. The lack of deals is largely because buyers are seeking 20 percent or more value reductions from mid-2022 values, even for industrial and apartment properties, for which NOIs are generally up by 5-10 percent. Buyers are effectively using an unchanged rent and occupancy proforma versus 18 months ago, plugging in today\u2019s loan terms and leverage, and \u201cback-solving\u201d for the value that yields their target IRR. This results in roughly 20 percent lower bids. But there is simply no reason for owners with locked-in low-rate seven- to 10-year debt and increasing NOIs to sell at such pricing.<\/p>\n\n\n\n

Is the story different for floating-rate debt owners <\/a>who have seen 400-500 basis point interest rate increases? Even with increased NOIs, floating-rate borrowers with 60 to 70 percent LTVs have been pushed into negative cash flow situations, giving bidders hope. But simple math indicates this hope is largely a fantasy.<\/p>\n\n\n

\n
\"Peter-Linneman\"
Peter Linneman<\/figcaption><\/figure><\/div>\n\n\n

Consider a stabilized apartment property that was worth $100 million at a 3.7 percent cap rate in early 2022. It has a $70 million interest-only loan with an original floating interest rate of 2.5 percent. Given the market changes since early 2022, we estimate that this owner is facing net cash flow of -$1.4 million per year.<\/p>\n\n\n\n

With the expectation of falling short-term rates, it is highly implausible that such owners would take the 20 percent value reduction. Not only does history show that capital markets adjust when fear swings to greed, but such a sale would wipe out two-thirds of the owner\u2019s equity and any fees generated by the asset. Owners realize that the property will once again cash flow when the short-term interest rate falls by 200 bps, even if NOI fails to grow. The owner may be compelled to sell at 4 to 5 percent less, but not 20 percent. Instead, they will beg, borrow or come out-of-pocket to fill the shortfall and keep asset value optionality alive. Thus, while capital sources are looking to put out $40 million in new equity to buy such assets at $80 million with a 50 percent LTV, they are only finding opportunities to place perhaps $2 million to $3 million in mezzanine debt to cover the owner\u2019s shortfalls.<\/p>\n\n\n\n

Dr. Peter Linneman is a principal & founder of Linneman Associates (<\/em>www.linnemanassociates.com<\/em><\/a>), Professor Emeritus at the Wharton School of Business, University of Pennsylvania, author of \u201cReal Estate Finance and Investments: Risks and Opportunities,\u201d and co-author of \u201cThe Great Age Reboot: Cracking the Longevity Code for a Longer Tomorrow.\u201d Follow Dr. Linneman on X: @P_Linneman<\/em><\/p>\n\n\n\n

Read the May 2024 issue of C<\/a>PE.<\/a><\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Buyers and sellers are still not on the same page when it comes to values, according to economist Peter Linneman. <\/p>\n","protected":false},"author":893,"featured_media":1004711971,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[1521,37752,51037],"tags":[],"class_list":["post-1004711969","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-digital","category-research-center-economy-ecommerce","category-trends"],"acf":[],"yoast_head":"\nEconomist's View: Distress Opportunity Awaits\u2014Or Does It? - Commercial Property Executive<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.commercialsearch.com\/news\/economists-view-distress-opportunity-awaits-or-does-it\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Economist's View: Distress Opportunity Awaits\u2014Or Does It?\" \/>\n<meta property=\"og:description\" content=\"Buyers and sellers are still not on the same page when it comes to values, according to economist Peter Linneman.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.commercialsearch.com\/news\/economists-view-distress-opportunity-awaits-or-does-it\/\" \/>\n<meta property=\"og:site_name\" content=\"Commercial Property Executive\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/CPExecutive\" \/>\n<meta property=\"article:published_time\" content=\"2024-05-01T19:53:49+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2025-03-26T18:06:42+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2024\/04\/iStock-471878223-Image-by-ferrantraite.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"1200\" \/>\n\t<meta property=\"og:image:height\" content=\"900\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Peter Linneman\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@cpexecutive\" \/>\n<meta name=\"twitter:site\" content=\"@cpexecutive\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.commercialsearch.com\/news\/economists-view-distress-opportunity-awaits-or-does-it\/\",\"url\":\"https:\/\/www.commercialsearch.com\/news\/economists-view-distress-opportunity-awaits-or-does-it\/\",\"name\":\"Economist's View: Distress Opportunity Awaits\u2014Or Does It? - Commercial Property Executive\",\"isPartOf\":{\"@id\":\"https:\/\/www.commercialsearch.com\/news\/#website\"},\"primaryImageOfPage\":{\"@id\":\"https:\/\/www.commercialsearch.com\/news\/economists-view-distress-opportunity-awaits-or-does-it\/#primaryimage\"},\"image\":{\"@id\":\"https:\/\/www.commercialsearch.com\/news\/economists-view-distress-opportunity-awaits-or-does-it\/#primaryimage\"},\"thumbnailUrl\":\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2024\/04\/iStock-471878223-Image-by-ferrantraite.jpg\",\"datePublished\":\"2024-05-01T19:53:49+00:00\",\"dateModified\":\"2025-03-26T18:06:42+00:00\",\"author\":{\"@id\":\"https:\/\/www.commercialsearch.com\/news\/#\/schema\/person\/e4a3cfb575779f209519867f7aae64f4\"},\"breadcrumb\":{\"@id\":\"https:\/\/www.commercialsearch.com\/news\/economists-view-distress-opportunity-awaits-or-does-it\/#breadcrumb\"},\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\/\/www.commercialsearch.com\/news\/economists-view-distress-opportunity-awaits-or-does-it\/\"]}]},{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/www.commercialsearch.com\/news\/economists-view-distress-opportunity-awaits-or-does-it\/#primaryimage\",\"url\":\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2024\/04\/iStock-471878223-Image-by-ferrantraite.jpg\",\"contentUrl\":\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2024\/04\/iStock-471878223-Image-by-ferrantraite.jpg\",\"width\":1200,\"height\":900,\"caption\":\"Economist's View. Image by ferrantraite\/iStockphoto.com\"},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\/\/www.commercialsearch.com\/news\/economists-view-distress-opportunity-awaits-or-does-it\/#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\/\/www.commercialsearch.com\/news\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"Economist’s View: Distress Opportunity Awaits\u2014Or Does It?\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\/\/www.commercialsearch.com\/news\/#website\",\"url\":\"https:\/\/www.commercialsearch.com\/news\/\",\"name\":\"Commercial Property Executive\",\"description\":\"\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\/\/www.commercialsearch.com\/news\/?s={search_term_string}\"},\"query-input\":{\"@type\":\"PropertyValueSpecification\",\"valueRequired\":true,\"valueName\":\"search_term_string\"}}],\"inLanguage\":\"en-US\"},{\"@type\":\"Person\",\"@id\":\"https:\/\/www.commercialsearch.com\/news\/#\/schema\/person\/e4a3cfb575779f209519867f7aae64f4\",\"name\":\"Peter Linneman\",\"image\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/www.commercialsearch.com\/news\/#\/schema\/person\/image\/\",\"url\":\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2021\/05\/Peter-Linneman.jpg?w=96\",\"contentUrl\":\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2021\/05\/Peter-Linneman.jpg?w=96\",\"caption\":\"Peter Linneman\"},\"description\":\"Dr. Peter Linneman is a principal and founder of Linneman Associates and professor emeritus at The Wharton School, University of Pennsylvania.\",\"url\":\"https:\/\/www.commercialsearch.com\/news\/author\/peter-linneman\/\"}]}<\/script>\n<!-- \/ Yoast SEO Premium plugin. -->","yoast_head_json":{"title":"Economist's View: Distress Opportunity Awaits\u2014Or Does It? - Commercial Property Executive","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/www.commercialsearch.com\/news\/economists-view-distress-opportunity-awaits-or-does-it\/","og_locale":"en_US","og_type":"article","og_title":"Economist's View: Distress Opportunity Awaits\u2014Or Does It?","og_description":"Buyers and sellers are still not on the same page when it comes to values, according to economist Peter Linneman.","og_url":"https:\/\/www.commercialsearch.com\/news\/economists-view-distress-opportunity-awaits-or-does-it\/","og_site_name":"Commercial Property Executive","article_publisher":"https:\/\/www.facebook.com\/CPExecutive","article_published_time":"2024-05-01T19:53:49+00:00","article_modified_time":"2025-03-26T18:06:42+00:00","og_image":[{"width":1200,"height":900,"url":"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2024\/04\/iStock-471878223-Image-by-ferrantraite.jpg","type":"image\/jpeg"}],"author":"Peter Linneman","twitter_card":"summary_large_image","twitter_creator":"@cpexecutive","twitter_site":"@cpexecutive","schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"WebPage","@id":"https:\/\/www.commercialsearch.com\/news\/economists-view-distress-opportunity-awaits-or-does-it\/","url":"https:\/\/www.commercialsearch.com\/news\/economists-view-distress-opportunity-awaits-or-does-it\/","name":"Economist's View: Distress Opportunity Awaits\u2014Or Does It? - Commercial Property Executive","isPartOf":{"@id":"https:\/\/www.commercialsearch.com\/news\/#website"},"primaryImageOfPage":{"@id":"https:\/\/www.commercialsearch.com\/news\/economists-view-distress-opportunity-awaits-or-does-it\/#primaryimage"},"image":{"@id":"https:\/\/www.commercialsearch.com\/news\/economists-view-distress-opportunity-awaits-or-does-it\/#primaryimage"},"thumbnailUrl":"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2024\/04\/iStock-471878223-Image-by-ferrantraite.jpg","datePublished":"2024-05-01T19:53:49+00:00","dateModified":"2025-03-26T18:06:42+00:00","author":{"@id":"https:\/\/www.commercialsearch.com\/news\/#\/schema\/person\/e4a3cfb575779f209519867f7aae64f4"},"breadcrumb":{"@id":"https:\/\/www.commercialsearch.com\/news\/economists-view-distress-opportunity-awaits-or-does-it\/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/www.commercialsearch.com\/news\/economists-view-distress-opportunity-awaits-or-does-it\/"]}]},{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/www.commercialsearch.com\/news\/economists-view-distress-opportunity-awaits-or-does-it\/#primaryimage","url":"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2024\/04\/iStock-471878223-Image-by-ferrantraite.jpg","contentUrl":"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2024\/04\/iStock-471878223-Image-by-ferrantraite.jpg","width":1200,"height":900,"caption":"Economist's View. Image by ferrantraite\/iStockphoto.com"},{"@type":"BreadcrumbList","@id":"https:\/\/www.commercialsearch.com\/news\/economists-view-distress-opportunity-awaits-or-does-it\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/www.commercialsearch.com\/news\/"},{"@type":"ListItem","position":2,"name":"Economist’s View: Distress Opportunity Awaits\u2014Or Does It?"}]},{"@type":"WebSite","@id":"https:\/\/www.commercialsearch.com\/news\/#website","url":"https:\/\/www.commercialsearch.com\/news\/","name":"Commercial Property Executive","description":"","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/www.commercialsearch.com\/news\/?s={search_term_string}"},"query-input":{"@type":"PropertyValueSpecification","valueRequired":true,"valueName":"search_term_string"}}],"inLanguage":"en-US"},{"@type":"Person","@id":"https:\/\/www.commercialsearch.com\/news\/#\/schema\/person\/e4a3cfb575779f209519867f7aae64f4","name":"Peter Linneman","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/www.commercialsearch.com\/news\/#\/schema\/person\/image\/","url":"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2021\/05\/Peter-Linneman.jpg?w=96","contentUrl":"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2021\/05\/Peter-Linneman.jpg?w=96","caption":"Peter Linneman"},"description":"Dr. Peter Linneman is a principal and founder of Linneman Associates and professor emeritus at The Wharton School, University of Pennsylvania.","url":"https:\/\/www.commercialsearch.com\/news\/author\/peter-linneman\/"}]}},"jetpack_featured_media_url":"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2024\/04\/iStock-471878223-Image-by-ferrantraite.jpg","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/www.commercialsearch.com\/news\/wp-json\/wp\/v2\/posts\/1004711969","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.commercialsearch.com\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.commercialsearch.com\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.commercialsearch.com\/news\/wp-json\/wp\/v2\/users\/893"}],"replies":[{"embeddable":true,"href":"https:\/\/www.commercialsearch.com\/news\/wp-json\/wp\/v2\/comments?post=1004711969"}],"version-history":[{"count":9,"href":"https:\/\/www.commercialsearch.com\/news\/wp-json\/wp\/v2\/posts\/1004711969\/revisions"}],"predecessor-version":[{"id":1004752276,"href":"https:\/\/www.commercialsearch.com\/news\/wp-json\/wp\/v2\/posts\/1004711969\/revisions\/1004752276"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.commercialsearch.com\/news\/wp-json\/wp\/v2\/media\/1004711971"}],"wp:attachment":[{"href":"https:\/\/www.commercialsearch.com\/news\/wp-json\/wp\/v2\/media?parent=1004711969"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.commercialsearch.com\/news\/wp-json\/wp\/v2\/categories?post=1004711969"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.commercialsearch.com\/news\/wp-json\/wp\/v2\/tags?post=1004711969"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}