By Samantha Rowan
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As the commercial real estate market gears up to tackle a heavy year of loan maturities, there is a dearth of people to fill a critical function: working out loans. There are about $659 billion maturing in 2025. And market participants who spoke with Real Estate Capital USA said there has been a notable increase in lenders and borrowers seeking to resolve situations of distress.
“it is pretty apparent that there are a lot of investments made over the past few years that have issues with the debt,” said Kent Elliott, a principal at Newport Beach, California-based executive search firm RETS Associates. “There are scores of examples of developers with loans coming due and who are seeking short-to medium-term solutions.”
The problem, however, is that the workout skill set has fallen dormant in the years since the global financial crisis.
“No one under the age of 35 has the experience in this space, “ Elliott said. “As distress becomes more prevalent with banks and financial institutions, finding the talent to handle these workouts is going to be challenging. You can just say, ‘I want someone who has been doing this for the past five years, ‘ but there is no one who has been doing this during that time.”
Workouts in Progress
Danielle D’Ambrosio, head of real estate debt asset management for Charlotte based investment manager Barings, said the firm is expecting to see workouts rise in the coming year and lenders and borrowers confront the looming wall of maturities.
“When we started this year, we knew it wasn’t going to be easy. In debt asset management, we modified more than $3 billion of loans this year and borrowers put in more than $100 million of equity. We realized zero impairments and did not subordinate a dollar of debt.”
D’Ambrosio noted a key difference between working out loans today and during the financial crisis: the interest rate environment.
“We were helped by interest rates in the global financial crisis and the conversation around value was very different than the conversation about value today,” D’Ambrosio said. “We have used the lessons of the past to originate over the past 15 years and that has resulted in strong borrowers with strong properties and cashflow. We never really went back to the loose credit standards that you saw across the market.”
The other factor that has helped Barings specifically has been the firm’s focus on both debt and equity, D’Ambrosio added.
“We are not like the traditional bank in that we can take a property back, create a business plan for it, and hold it for as long as our clients want. Having that stick from a negotiation perspective and the carrot of being empowered to work things out helps us work with our borrowers, if they perform and act appropriately,” D’Ambrosio said. “In a good negotiation, no one is happy, but everyone understands where we had to get to, and we worked towards that for both parties.”
