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Commercial Leasing Law & StrategyFeaturesBankruptcyLandlord Tenant Law

Distressed Investors Should Take Advantage of the Upcoming Plethora of Defaulted CRE Loans

By Joseph J. Ori
August 01, 2023

Investing in distressed CRE assets in 2023 and 2024 will be the key to earning high returns on capital in the real estate industry. What is different about this distressed cycle is that most of the lenders are not foreclosing and taking title to the CRE assets, managing, and leasing them for a few months and then selling the properties. They are more likely to sell the note/mortgage rather than foreclose on the property. Like a lot of industries including hotel management, technology manufacturing, food delivery and ride-sharing, lenders prefer to be "asset-light" concerning large and complex CRE assets. This presents a unique and interesting opportunity for astute distressed investors, who are experienced in acquiring mortgage notes secured by commercial property and in the arduous foreclosure and bankruptcy process, which may follow, to obtain a clean title to the property. Distressed investors should be raising capital right now to take advantage of the upcoming plethora of defaulted CRE loans.

CRE distress and defaults in this cycle will be caused by the following issues:

  1. Higher interest rates and the inability of the borrower to refinance at these higher rates
  2. A reduction in occupancy, revenue and NOI and inability for the borrower to cover the current debt service on the property
  3. Mortgage loan and covenant breaches
  4. Inability to make required payments and escrows under the note and mortgage
  5. Higher and in some cases prohibitive costs to eliminate interest rate risk from floating rate loans with an interest rate swap or collar
  6. A significant decline in the value of the property
  7. A reduction in the occupancy of the property and loss or bankruptcy of major tenants

With all the above issues currently affecting about 2.0% or $90 billion of the total CRE loans outstanding of $4.5 trillion, there is a great opportunity for distressed investors to contact the various CRE lenders and seek to acquire the note and mortgage on the property at a significant discount. If the average defaulted loan is $25 million, there will be 3,600 distressed deals during the next two years from which to choose. Since today's distressed investors are accepting higher risk by buying the note/mortgage and then going through the foreclosure process, which would normally be done by the original lender, the discount on the loan paper has to be an additional 10%-15% than if the property was sold by the lender as a foreclosed asset.

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