Wall Street Journal 08_04_2020

B6| Wednesday, April 8, 2020 THE WALL STREET JOURNAL.

Cashreservesheldby

opportunisticanddistressed

real-estatefunds

Source: Preqin

Note: Numbers are as of December of each

year. Cash reserves are commitments from

investors that haven't been invested yet.

$150

0

25

50

75

100

125

billion

2000 ’10’05 ’15

When the coronavirus

started spreading in the U.S.,

office owners with long-term,

stable leases hoped their

buildings would become a ha-

ven for skittish investors.

But nearly a month into the

pandemic, the opposite has

happened.

Investors are dumping

shares of major office real-es-

tate investment trusts. Sales

of skyscrapers are unraveling,

and office tenants across the

country are negotiating to

lower their rent bills.

The recent trouble in the

sector belies office buildings’

reputation as a safe holding

because they are mostly leased

to long-term tenants. But as

the U.S. economy shrinks and

businesses shutter, investors

are asking: What good is a

long-term lease if the tenant

won’t pay rent? And what is

an office building worth if no

one can use it?

“I don’t think people have

understood that this is a work-

place virus,” said Amol Sarva,

chief executive of Knotel Inc.,

which rents out furnished of-

fices to companies and re-

cently laid off 30% of its staff

and furloughed another 20%.

Office owners tend to have

more debt, in part because

banks have been willing to

lend more against assets they

deemed safe. Having a lot of

debt limits their ability to be

offensive when the economy

turns around,” said Daniel Is-

mail, a senior analyst at Green

Street Advisors.

The office selloff indicates

that trouble in commercial

real estate is spreading be-

yond hotels and retail proper-

ties and now threatens much

of the $16 trillion U.S. com-

mercial real-estate market and

the $4.5 trillion in mortgage

debt secured by it.

The value of commercial

mortgage-backed securities

has plummeted and new lend-

ing has mostly ground to a

halt. Some lenders that hold

commercial mortgages and

mortgage-backed securities

are facing margin calls from

their banks.

SL Green Realty Corp., one

of the biggest office landlords,

has one of the highest debt

burdens among major public

real-estate companies. Its

share price is down 50% since

the beginning of the year. The

share price of Vornado Realty

Trust, which has a large Man-

hattan portfolio, is down 44%

this year. That compares with

an 18% drop for the S&P 500.

One risk office owners face

is that companies stop signing

new leases amid the economic

uncertainty. In Manhattan, of-

fice leasing volume already fell

by 46.9% in the first quarter

compared with the 10-year

quarterly average, according

to brokerage firm JLL. The

greater danger is that tenants

across the country stop paying

rent on their existing leases.

“You would think that the

office market should be some-

what insulated. You’ve got

long-term leases,” said Joseph

Iacono, CEO of alternative fi-

nancing platform Crescit Capi-

tal Strategies.

In a poll conducted Thurs-

day and Friday among 1,000

small businesses by the small

business social-networking

company Alignable Inc., 30%

of respondents said they had

made no rent or mortgage

payment for April, and an ad-

ditional 20% said they made

only a partial payment.

BYKONRADPUTZIER

Virus Woes

Sap Safety

Of Office

Market

SL Green Realty

Vornado Realty Trust

Boston Properties

Vanguard Real

Estate ETF

Share-priceperformance,

yeartodate

Source: FactSet

20

–80

–60

–40

–20

0

%

Jan. April

medical use are paid by the

government. That may also

mean jobs for hotel employees

providing laundry services or

food for those in quarantine.

Mr. Patel declined to detail

how much he was being paid

for use of his hotel, but he

said, “We are not making a lot

of money. We are able to pay

our mortgage, taxes, keep the

lights on, so it covers our ba-

sic costs to keep this building.”

The county is giving him a

break on occupancy taxes, he

added.

There are potential down-

sides to medical use, including

property damage as well as

concern that a hotel that be-

comes associated with a highly

contagious disease might have

trouble attracting guests once

the crisis is over.

Mr. Patel said he isn’t wor-

ried about such concerns, say-

ing he will be able to sanitize

the property afterward.

Now 43 years old, Mr. Patel

was born in London and came

to the U.S. as a child. After

leaving the health-care indus-

try, Mr. Patel worked atXerox

HoldingsCorp. before he left

in 2018. He and his wife then

decided to go into the lodging

business two years ago. Both

of their families had a history

of owning hotels. “It’s been a

rough 18 months, and then a

pandemic happens,” said Mr.

Patel.

His property, about 9 miles

from Lake Ontario, typically

serves guests such as parents

visiting students at the Uni-

versity of Rochester. The hotel

had anticipated a steady

stream of visitors for a track-

and-field tournament that

ended up being canceled.

The Clarion Pointe in Roch-

ester has features that make it

suitable as a temporary quar-

antine facility. As part of a

makeover two years ago, car-

pets and drapes were removed,

reducing allergen buildup.

To pass the time, guests can

“cast” shows from streaming

services including Netflix and

Hulu to their hotel-room TVs

by using their personal sub-

scriptions.

THE PROPERTY REPORT

The coronavirus was
spreading rapidly across New
York. Room cancellations were
flooding this upstate hotel’s
reservation system after the
state ban on mass gatherings,
and there was no sign of
things turning around soon.
So on March 13, Silas Patel,
who owns a Clarion Pointe
branded hotel in Rochester,
N.Y., with his wife, knew what
he had to do. He offered the
43-room midscale property to
local authorities for use as a
quarantine facility.
The hotel is currently hous-
ing two people in mandatory
quarantine. While Monroe
County, N.Y., officials declined
to describe the condition of
patients who will be staying
there, Mr. Patel said the facil-
ity is intended for those who
have tested positive for the
coronavirus but can’t isolate at
home for whatever reason.
“Within one hour, they
came to see the site, and
within three hours they had a
lease produced for us,” said
Mr. Patel. “We signed it, and
as of the 18th, they operate
the hotel.”
Mr. Patel, who spent more
than a decade working in
health-care finance and policy,
and his wife, Micky Patel, a
registered nurse, said they un-
derstood that the outbreak
was worsening and knew quar-
antine facilities were neces-
sary. “It’s epidemiology 101,”
Mr. Patel said. “The numbers
will continue to grow until we
can flatten the curve.”
Property owners have other
reasons to turn over their ho-
tels. The Patels estimated that
their hotel’s revenue, including
the county lease, will drop
60% in the second quarter
compared with a year earlier,
and other hotel owners said
they are experiencing bigger
declines.
While thousands of hotels
across the U.S. have closed
their doors for lack of busi-
ness, those that convert to

BYESTHERFUNG

Hotels Invite Quarantined Guests

With travel dried up,

some empty rooms

are housing people

who need to isolate

This 43-room hotel in Rochester, N.Y., has been turned over to public-health authorities for people who need a place to quarantine.

LIBBY MARCH FOR THE WALL STREET JOURNAL

rected Capital only paid about

$7.4 million, according to CEO

Chris Moench.

Other investors had already

begun raising money, leaving

them well positioned to bargain

hunt now. Blackstone finished

raising the largest commercial

real-estate fund ever in Septem-

ber, with $20.5 billion in com-

mitments. The company also

has a $7.1 billion Asia-focused

opportunistic real-estate fund

and is approaching the close of

a $10 billion Europe-focused

fund. Brookfield Asset Manage-

ment raised $15 billion for a

fund that closed last year.

Fortress Investment Group,

whose real-estate funds have

around $3 billion in cash or

cash commitments, was already

buying up defaulted mortgages

before the virus spread, accord-

ing to people familiar with the

matter.

David Schechtman, a broker

at Meridian Capital Group, pre-

dicts that bankruptcy auctions

in the property market will be-

come a regular occurrence.

“Our thoughts and prayers

are with all of our fellow Ameri-

cans and nobody wants to capi-

talize on anybody’s misfortune,”

Mr. Schechtman said. “But I will

tell you, real-estate investors—

when you take the emotion out

of it—many of them have been

waiting for this for a decade.”

margin calls from their banks.

The Royal Bank of Canada last

month sought bids for $600

million in mortgage debt that it

seized from clients.

Distressed hotel debt and

properties could be next, even

though “there aren’t a lot of

deals to talk about yet,” said

Daniel Peek, president of the

hotel group at brokerage

Hodges Ward Elliott.

Many investors believed in

2008 that the fallout from the

sudden collapse of Lehman

Brothers Inc. would make for

the best bargain hunting of

their careers. Commercial prop-

erty prices fell by 35% between

August 2008 and June 2010, ac-

cording to Real Capital Analyt-

ics, but recovered in the follow-

ing years.

But some of the same inves-

tors expect a worse downturn

now. The previous crisis started

in financial markets and gradu-

ally spread into the real econ-

omy. Property owners had trou-

ble getting new loans from

skittish banks, but most tenants

still paid rent, meaning land-

lords were able to keep paying

their mortgage bills.

This time, the sudden shut-

down of vast parts of the U.S.

economy is leaving landlords

with less rental income, and

many may well default on their

mortgages this month.

There is plenty of money

waiting to pounce. In December,

private real-estate funds that

focus on opportunistic and dis-

tressed-asset investments held

$142 billion in dry powder, ac-

cording to data firm Preqin—up

from $94 billion in December

2008.

Greystone & Co.,aNew

York-based real-estate firm, is

raising a fund with up to $400

million to buy distressed debt.

“There’s not much liquidity in

the market so prices are getting

cheaper and cheaper,” said

Greystone CEO Stephen Rosen-

berg. Directed Capital, a St. Pe-

tersburg, Fla.-based investment

firm, bought about 15 loans in-

volving about a dozen different

borrowers from a bank late last

month. The loans had a face

value of $10 million, but Di-

prices in the U.S. more than

doubled over the past decade,

according to Real Capital Ana-

lytics, leading many investors to

conclude that the market had

settled near a peak and so af-

forded few buying opportuni-

ties. Now, many of these assets

could soon hit the market as

lenders and desperate landlords

look to raise cash.

Mortgage defaults have been

few. Investors expect that to

change over the coming weeks

and months. Once a borrower

defaults, the lender often

chooses to sell the loan at a dis-

count to avoid the hassle of a

lengthy foreclosure lawsuit.

Some of the first distressed

assets to hit the market have

been mortgage-backed securi-

ties held by real-estate invest-

ment trusts, which are facing

pandemic has closed businesses

across the country, leaving

them unable to pay rent and

their landlords unable to pay

their mortgage bills. The cur-

rent environment presents the

sort of circumstances that risk-

taking property investors say

can make a career. And while

investors are in it for the profit,

they also say their investments

may help the market bounce

back and stabilize property

prices.

“There are people that do

have dry powder, like us, and

that will recognize this as one

of the greatest buying opportu-

nities of the century,” said Dan-

iel Lebensohn, co-founder of the

investment firm BH3, which

launched a $100 million dis-

tressed-debt fund in late 2018.

Commercial real-estate

A growing number of prop-
erty investors are preparing for
what they believe could be a
once-in-a generation opportu-
nity to buy distressed real-es-
tate assets at bargain prices.
Investment firms likeBlack-
stone GroupInc.,Brookfield
Asset ManagementandStar-
wood Capital Groupare sitting
on billions of dollars in cash
and capital commitments they
have raised from pensions, sov-
ereign-wealth funds and other
big institutions in recent years.
Many of these firms are eye-
ing hotels, retail properties,
mortgage-backed securities and
other assets that have come un-
der stress in recent weeks as
the spread of the coronavirus

BYKONRADPUTZIER
ANDPETERGRANT

Investors See Bonanza in Distressed Real Estate

Owners Offer Sites

For Medical Use

As the coronavirus pan-

demic causes travel to grind to

nearly a halt, more hoteliers

are offering their properties for

medical use or lodging.

More than 15,000 hotels

across the U.S. have offered to

provide temporary housing for

emergency and health-care

workers, according to the

American Hotel & Lodging As-

sociation, a trade group.

A much smaller number of

hotels are being used as Alter-

native Care Sites, such as

emergency hospitals or places

for those quarantined to stay

as needed, the organization

said.

As of March 22, two hotels

in California have been tempo-

rarily converted for health-care

use during the public-health

emergency, according to the

U.S. Army Corps of Engineers.

In New York City, about

half a dozen hotels have been

turned into facilities housing

Covid-19 patients who have

few health complications but

need to be isolated, said Vijay

Dandapani, president and chief

executive of the Hotel Associa-

tion of New York City.

He expects owners to vol-

unteer another 20 more prop-

erties by the end of this week.

Might potential future

guests have some qualms

about staying in hotels that

housed medical workers or

quarantined people during a

pandemic?

“That’s hard to tell, but yes

that thought has crossed peo-

ple’s minds,” said Mr. Danda-

pani.

Some hotels in Asia have

offered special packages for

people who need—or want—to

quarantine themselves. Hong

Kong recently put a rule into

effect requiring all people arriv-

ing from abroad to be in quar-

antine for two weeks.

TEXAS

     









 

    



  





  





    



   





  











    













  







 

 

 





   

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