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.
Relatively Painless
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.