Outlook 2021: a Pressurized Wave of Loan Sales

Takeaways: 

• 2021 is expected to bring a significant uptick of NPLs to market starting in Q1 flowing from banks and direct lenders.   
• Performing loan sales are expected to increase due to M&A, relocation, rebalancing and market dynamics. 
• The Bid-Ask spread is expected to lessen.
• Distress is predominantly found in the hotel and retail sector with an investor preference for the hotel market. 

January 2020 roared in with a strong economic tide after a decade of expansion.  The year had surging leading indicators and steady economic growth.  Then a global pandemic put the system to the test for a tumultuous year pushing unemployment to all time high in April.  

Despite the market volatility, personal pains and professional hits felt this year, the market heading into 2021 boasts low interest rates, banks and investors flush with cash, and an S&P 500 index up 15% YTD.  A vaccine is being rolled out and election uncertainty is over.  We anticipate 2021 will be a strong year for the capital markets given no additional unforeseen economic shocks. 

Commercial Real Estate

With respect to the CRE markets, property types have not been uniformly hit.  Restrictions on travel and lockdown have added immense stress to the hotel and retail property types.  Trepp reports 25.5% of hotels and 17.5% of retail CMBS loans are in special servicing in November 2020.  

Source:  Trepp

Strain has been found in large cities tied to high density use and public transport affecting office and multifamily.  In New York City, employees office occupancy is estimated at 15% capacity and net-effective rent for apartments is down 22% in November according to a report by Miller Samuel and Douglas Elliman.  

Nationwide, workforce housing collections have been disrupted by the high unemployment with NMHC reporting rent non-payments of 25% for December 2020.    

Loan Sales

With respect to loan sales, Metechi is seeing an uptick in both performing and non-performing loans sales for 2021 kicking off in Q1.  

Performing loan sales and syndications are driven by M&A activity, banks relocating their geographic footprint, portfolio rebalancing and the general uptick in the lending market.  Outside of the normal business flow of performing loan sales, there is a demand for performing loans from banks and funds that held back in both lending and buying in 2020 and are underallocated.   

The CoStar Group estimates that more than $126 billion of CRE will be sold at distressed prices in the next two years and up to $659 billion in the next five years.  The November delinquency rate is 5.7% as reported by the MBA.  NPL and REO sales that came to market in 2020 had to a large part  been pre-covid deals.  Banks and insurance companies did not have regulatory pressure to dispose of non-performing loans in 2020.  We expect that this all changes in Q1 2021 as lenders look to clean up their balance sheet. 

Distressed deals that did come to market in 2020 were faced with a bid ask spread issue that may not have made it to the closing table.  We anticipate that this spread shrinks in 2021 due to lenders having more realistic expectations of below par sales and available capital to potentially chase after deals. 

A helpful visual distressed sales potential sources can be found from the below graphic from Real Capital Analytics.  During the last crisis, the highest leverage and the highest market share was CMBS.  This time around, we see a different story.  Higher leverage was found in direct lenders and banks.  We do still anticipate seeing distressed sales from CMBS and insurance companies though for potentially smaller discounts and heavier on retail and hotel property types.  

From a property type perspective, we anticipate the majority of distress to be found in hotel and retail.  More capital is poised to take on the hotel distress than the retail distress opportunities.  Creative capital and sources of rescue capital are needed for retail.  NPL sales are also expected in office and multifamily with limited industrial.  

Conclusion

Metechi anticipates 2021 being an active year for loan sales and a resurgence of the economy.  Distress will continue to be differentiated by property type.  All types of lenders are expected to sell loans, with potentially deeper discounts from the higher leverage from direct lenders and banks than insurance companies.  We expect to have a more robust lending market which includes more origination volume and increased market for performing loans sales.  

Metechi’s goal is to efficiently bring together buyers and sellers using technology as a cost effective option.  Please reach out. Happy to help and share information.