In the headlines, debt is a primary concern for commercial property owners, even those in high-performing sectors like multifamily.
Data from analytics firm Trepp shows that more than $500 billion in business real estate debt will come due this year, and another $2 trillion will be due in the next four years.
Recapitalizing assets means paying to make up for stock losses and taking on much higher financing costs since interest rates have increased significantly in the past 18 months.
Brookfield and Blackstone were there when these things happened. Blackstone made headlines last year when it didn’t pay back a $308 million loan on an office block in Manhattan called 1740 Broadway.
Brookfield, on the other hand, stopped making payments on investments in Washington, DC, and Los Angeles earlier this year.
Again, the headlines can be misleading because these properties were paid for with securitized mortgages, which require restructurings to be worked out with a special servicer who works for the bondholders.
A special servicer can only be chosen if the borrower stops making payments. So, at first glance, a default may seem bad, but it is the smartest thing to do.
Ronald Dickerman, the president and founder of Madison International Realty, a New York-based company that works on recapitalizations, says that companies that need cash must first get past a few key mental barriers.
“You have to make sure that there is cap rate surrender, that the cap rate in a seller’s mind is properly marked to market and reflects the current state of affairs. There is a big difference between what buyers and sellers are willing to pay right now because many sellers haven’t noticed that the cap rate environment has changed,” says Dickman.
The second thing is negative leverage. Now that the interest rate on borrowing is higher than the rate of return on the real estate itself, most investors who use traditional leverage will have to accept some periods of negative leverage, then raise rents or improve assets through leasing to fix the situation over time.
