(Bloomberg) — Some of the largest real estate investors are walking away from debt on bad property deals, even as they raise billions of dollars for new opportunities borne of the pandemic.
The willingness of Brookfield Property Partners LP, Starwood Capital Group, Colony Capital Inc. and Blackstone Group Inc. to skip payments on commercial mortgage-backed securities backed by hotels and malls illustrates how the economic fallout from the coronavirus has devalued some real estate while also creating new targets for these cash-loaded investors.
“Just because a prior investment didn’t work out doesn’t necessarily mean that should tarnish the reputation for future endeavors,” said Alan Todd, head of U.S. CMBS research for Bank of America Securities. “It’s not like something was done in bad faith.”
While cutting losers to buy winners is an age-old investment proposition, the Covid-19 pandemic may create even more openings than the past crises that became bonanzas for real estate investors. The mass exodus of Americans from public spaces has hammered already-weak retailers and their landlords, crippled business travel, crushed restaurants unable to fill all of their tables, and sown chaos for office towers whose tenants may never need as much space again.
Hotels and malls have been the biggest CMBS losers during the pandemic. Lodging and retail debt turned over to so-called special servicers — workout specialists — is at the highest level since 2010, according to industry tracker Trepp.
Missing payments on CMBS debt is relatively painless, because it’s typically non-recourse, meaning borrowers can hand over the keys to a property and lenders won’t be able to come after other assets. Property owners are more likely to walk away when their equity has been wiped out by lower values.
“They know that if they borrow from most lenders, they win if they win and they win if they lose,” said Ethan Penner, an investor who pioneered CMBS deals in the 1990s at Nomura Securities.
Starwood founder Barry Sternlicht and Colony Chairman Tom Barrack got their starts thanks to the 1980s savings and loan crisis, while Blackstone President Jon Gray traded stakes in hotels, offices and single-family homes to generate big returns through the financial crisis.
Now these firms are raising money for their next round of bets, even as they skip debt payments on old obligations.
At least 11 Brookfield malls with more than $2 billion in CMBS debt are delinquent or seeking payment relief because of Covid-19. The company has already repurchased some of its former debt at reduced prices.
“The lenders are willing to sell us their loans or the mortgages back at a discount,” Brookfield Property Chief Executive Officer Brian Kingston said during an Aug. 6 earnings call. “And so in that case we’ve been able to essentially reacquire the asset at an attractive basis.”
Brookfield Asset Management Inc., the parent of the property firm, raised $23 billion from investors in the most recent quarter, including $12 billion in new commitments for a distressed fund. Brookfield spokeswoman Kerrie McHugh declined to comment.
Colony has stopped making payments on many of its hotel bonds since the pandemic hit, while focusing on its long-planned “digital” real estate strategy — buying properties like cell towers, data centers and network infrastructure.
It began raising at least $6 billion for a second digital fund shortly before announcing plans in May to evaluate “strategic and financial alternatives” for 245 lodging properties with $3.5 billion in debt. Wells Fargo & Co., trustee of Colony’s Tharaldson hotel portfolio, sued in June in federal court to appoint a receiver to manage those hotels after Colony defaulted on the debt. The portfolio, with $842.7 million in loans, was reappraised in June at $836.7 million, down 36% from $1.3 billion in January 2018.
“We’ve been very careful not to put good money into bad situations,” Colony CEO Marc Ganzi said on a conference call earlier this month.
Blackstone, which ended its second quarter with $46 billion to invest in real estate deals, is delinquent on a $274 million mortgage for four Club Quarters Hotels. Blackstone is considering walking away from those properties, because it would cost too much to make them competitive, Bloomberg reported in June.
Hotel and retail properties represent just 13% of Blackstone’s real estate exposure and the Club Quarters mortgage is its sole delinquent CMBS.
Starwood is said to be raising $11 billion for a new opportunistic investment fund while also falling behind on payments for 17 of its 30 retail properties with almost $2 billion in CMBS debt. Management of three Starwood malls was assigned to a court-appointed receiver in April after it missed payments.
Debt on a four-mall portfolio was downgraded to junk following an appraisal that cut the property value 66% and wiped out Starwood’s equity.
“We remain committed to ensuring the best outcome possible for our investors in what has proven to be a very challenging asset class,” Starwood said in an emailed statement. “The level of uncertainty regarding tenant performance, anchor stability, capital markets and now the impact of the pandemic remains unprecedented and our strategy for these assets is evolving.”
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Montreal startup uses AI to set real-estate prices – Montreal Gazette
The pandemic has been devastating for so many businesses, but it has also provided opportunities for other entrepreneurs. Take the case of Montreal brothers Mark and Jordan Owen. Both saw their lives significantly altered by the COVID-19 crisis.
Mark, 28, was working for a local real-estate development firm and business had ground to a halt in the spring. Jordan, 26, was in a master’s program in real-estate development and city planning at the Massachusetts Institute of Technology (MIT) and had come back to Montreal in March because all in-person classes had been cancelled.
That’s when they had the idea of starting up a company to produce reusable masks. They founded Bien Aller, named in honour of the Quebec COVID catchphrase “Ça va bien aller.” They created the firm with a friend, Sean Tassé, who had been laid off from his job at a construction-management firm because of the pandemic.
Six months later, they’ve sold about 300,000 masks and they’re still producing them at facilities in Montreal and South Korea. Then the Owen brothers, Tassé and another friend, Benoit Thibeault, had a notion for a more unusual startup. The Owens’ background in Montreal real estate had them thinking that what developers and brokers could really use is a more reliable way to set prices for houses and condos that are going on the sales or rental markets.
Real Estate Investments in Greater Vancouver Offer Most Attractive Investment Yield
Is there an investment asset that can produce a 366 percent return in a three-decade span? Yes, it is the housing property in Canada. Is there an investment asset that can beat this performance? Yes, it is the property in Greater Vancouver in British Columbia, Canada. Indeed, Greater Vancouver has proven to be one of the real estate investment hotspots, given its appeal as an investment market that boasts natural beauty, strong economic and demographic fundamentals, and financial stability, which ensures optimal yield for a low level of investment risk.
Property prices in Greater Vancouver, BC, have risen by some 473.7 percent in the period between 1980 and 2009, yielding, on average, a spectacular 17 percent per annum over the noted period. In other words, according to the Canadian Real Estate Association (CREA) and RE/MAX Canada, the average price of residential property in Greater Vancouver in 1980 was slightly over $100,000. Today, that same property is worth, on average, somewhat more than $574,000.
The noted return on investment looks incredibly attractive, given the low risk associated with residential property investments. Investments in residential real estate in Greater Vancouver have been characterized by exceptional stability. The average price of a house in Greater Vancouver dipped seven times in the past 30 years. Most of the dips occurred in the late 1990s. However, all declines in average prices of homes in Greater Vancouver have been exceptionally mild, with the largest annual decreases not exceeding 3.5 percent.
This performance of real estate investments in Greater Vancouver looks remarkable compared to the implementation of property investments in the Canadian housing market as a whole or performance of investments in most other regional real estate markets in Canada. As noted earlier, the average price of a property in Canada has risen by 366 percent between 1980 and 2009. This translates into an average annual return of 13 percent in the same period. Only Victoria, Regina, Toronto, and Ottawa have recorded returns higher than this average for Canada as a whole. Victoria, located in British Columbia, has the second-highest return on residential real estate investments in the Canadian property market. An investment in Victoria’s housing property has returned 448.5 percent in total return, or 16 percent on average each year between 1980 and 2009. This makes British Columbia the best performing regional property market in Canada.
On the other hand, taking an international investment perspective, even less robust, would have been investment returns on U.S. real estate. Based on the average values of homes in the United States between 1980 and 2009 (using the Freddie Mac Conventional Home Price Index), an investment of $100,000 in residential properties in the United States in 1980 would be worth $382,576 today. This would represent a total return, measured by the increase in home prices, of 283 percent over the noted period. In other words, an investment in the real estate market in the United States would have produced an average nominal yield of 10 percent per annum, which is much lower than that earned on the property investment in Greater Vancouver.
Investments in residential real estate in the Greater Vancouver area look exceptionally appealing, given their outstanding performance relative to property investments in other regions of Canada and the U.S. real estate market. Therefore, investing in Greater Vancouver’s property market can represent an investment choice that promises high yield for a low level of investment risk.
Vancouver real estate: early September numbers show steep drop in sales from August highs – The Georgia Straight
Home sales in the city of Vancouver are dropping big time.
This is based on tracking by real-estate site fisherly.com as of late morning Friday (September 25).
Compared to record highs in August, early numbers for September show a steep decline in transactions.
In August, a total of 490 condo units sold in Vancouver.
As of this posting September 25, fisherly.com recorded 202 condo sales so far this month.
Last month, 212 detached homes changed owners.
September sales so far show 114 freestanding houses sold in the city.
As for townhouses, 99 sold in August.
As of September 25, only 49 townhouses have been purchased.
Vancouver home sales peaked in August, following a steady recovery that started in May.
Transactions crashed in April during the height of the COVID-19 lockdowns.
RBC Economics previously issued a report noting that pent-up demand for homes drove real estate sales in the country this summer.
However, according to the bank’s report, this demand is largely spent, and that the market’s momentum is expected to decelerate in the fall.
The Canadian Real Estate Association has forecast that after its highs and lows, 2020 may likely end up as a “fairly middling year overall”.
It remains to be seen whether the Vancouver market will stage a late September rally to boost numbers.
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