Briefings Distressed assets

Investors Need to Face Distressed Assets Now

Commercial real estate investors need to address distressed assets with urgency, as interest rates rise and inflation continues to be a factor.

Cyclical challenges in the economy are nothing new to commercial real estate developers and investors, and 2022 looks to be that kind of year for CRE professionals nationwide.

While many business owners may be tempted to put off facing distressed assets, ignoring the problem will not make it go away. Like a person ignoring symptoms of a serious illness, CRE investors in financial trouble have a far better chance of saving their business, their employees' jobs, and their reputations in the marketplace if they seek expert counsel early.

A thorough review of the financial situation can help business owners identify alternatives that may help them avoid bankruptcy before things go too far. And unfortunately, a wave of negative economic indicators is gathering on the horizon, with recent headlines warning of a scary end to this year and/or start to 2023.

Experts Forecast Looming Storm Clouds Ahead

Over the past few years, extraordinarily low interest rates and government funding have helped support our economy. This has allowed many individuals, business owners, real estate investors, and companies to stay above water. But this support effectively is just kicking the problems down the road — and now those problems are beginning to catch up with us.

Some with commercial real estate holdings are experiencing slowing or stopped pay from tenants. And as we have started to see, economic policy and support have begun to dwindle. Economic experts are predicting that many business owners will be hit toward the end of 2022 and into 2023.

Commercial property owners will be particularly affected as government funds dry up. Shopping center owners and CRE investors have been severely impacted by the pandemic. Already faced with the decline of brick-and-mortar businesses as online shopping becomes the new reality, the retail sector saw these problems become more severe as people moved more shopping online to reduce pandemic risk.

 Already faced with the decline of brick-and-mortar businesses as online shopping becomes the new reality, the retail sector saw these problems become more severe as people moved more shopping online to reduce risk from the pandemic.

In addition, business owners are facing the ongoing reality of being unable to secure supplies, employees, and/or operating capital. Many businesses have moved their payables from 30 days to 90 days, demonstrating a weakening financial picture. Continuing sanctions against foreign countries have exacerbated supply chain problems along with a backlog of ships in U.S. ports waiting to offload their contents. The obvious result is a difficulty in distributing supplies to their ultimate destinations after they have been off-loaded.

Ignoring the Problem Will Not Make It Go Away

Declining numbers of shoppers coupled with the staffing problems created by the Great Resignation have negatively impacted the bottom line for nearly all shopping centers' real estate. Many are wondering if the government will continue to prop up the economy through the continuation of loans and legislation that prevents evictions, foreclosures, and other types of enforcement of creditors' rights.

A past officer of the International Council of Shopping Centers, who is a well-known shopping center developer, suggests there is little doubt that dark clouds are on the horizon for the nation's shopping centers and retail real estate entrepreneurs. Defaults are continuing to occur, but the economy is not experiencing the large-scale disruption that usually accompanies large loan defaults. This combination may be a result of relaxed banking policies — federal bank regulators are not leaning on banks to come down harder on borrowers of loans that have gone bad.

Because banks have been given the opportunity to essentially ignore bad loans without negative consequences, they are sticking their collective heads in the sand. But that ignorance cannot last.

Now Is the Time to Restructure

Kicking a problem down the road can be an effective solution. Time changes situations after all. Sometimes the cause of the financial distress can be eliminated. Sometimes interest rates will drop, ushering in new financing opportunities. Sometimes the business or CRE entity can be restructured to remove the cause of the financial distress.

Avoiding the problem, however, usually is not a successful long-term solution for those already in financial distress. Interest rates are beginning to inch up, and, with inflation increasing, the Federal Reserve has said that rates are headed only one way in 2022 — and that is up.

With all these factors at play, the owners of  CRE property will have to contend with the consequences of default sooner or later. It seems advisable to consider addressing distressed financial assets by restructuring now, while lenders still are hesitant to exercise their rights to bad loans. They may not be willing to take over properties now, but that approach is likely to change in the coming months.

Now is the time to seek counsel from experts to stave off a Chapter 11 bankruptcy. Waiting too long to deal with financing issues often makes bankruptcy inevitable. Early intervention and attention to available alternatives can help real estate owners and investors mitigate the risk of bankruptcy before things go too far. Astute legal guidance can be a lifesaver for property owners and the employees whose livelihoods depend on the success of the business.

During times like these when we anticipate an increase in companies grappling with distressed assets, real estate owners can use a variety of methods to maximize value, restructure existing debt, repurpose assets, and modify their business to retain assets. The right counsel can help empower real estate owners with distressed assets to repair damage and build a better and brighter future.

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