Could Defaulting Commercial Mortgage Loans Help Alleviate Housing Shortage?

Dec 31, 2020

Could the new wave of commercial mortgage defaults help provide relief in the tight housing market?

While stimulus and hope of going back to the old normal may have helped stave off commercial real estate foreclosures and distressed sales so far, as those things fade away, many lenders and operators may have to face the facts, and take action. 

At the same time, housing seems to have proven to buck all expectations through the first wave of COVID lockdowns. House prices have rocketed as millions move to restructure their housing, and shortages of inventory haven’t made it easy for retail home buyers. 

Rentals are expected to soon see similar trends as residential foreclosures work through the process, and leave many with credit too bruised to qualify for mortgages for another decade. 

Commercial Real Estate in Distress

According to a spokesperson from the California Hotel & Lodging Association, more than half of the industry’s staff has been laid off in the past 12 months in that state, and around 59% of all hotels are struggling with late loan payments and defaulting mortgages. A fresh round of lockdowns and travel bans in states like CA and NY are likely to push even more over the edge.

With no end to these woes in sight, both lenders and operators are going to begin getting to grips with the fact they need to sell off these assets. Likely at deep discounts.  

Similar trends are going to appear in the office and retail space. Even schools may shed a lot of property.

On the up side, hotels in particular can be well positioned to be repurposed as housing. This can be either as affordable micro rental apartments or to sell off as condos. Both outcomes provide more fuel to the housing market.

Offices and retail may be better suited to becoming warehouses and distribution centers for delivery services. Schools could become hospitals. 

Multifamily & Residential

Many multifamily apartments and residential properties are ripe for repositioning as well. There are some landlords who are tired, and are not up to renovating and bringing their properties up to date. Or flipping their entire tenant base after the mess of 2020. Others bought too high, hoping to make money on travelers from short term Airbnb style rentals that can no longer make ends meet.

As eviction moratoriums expire, these properties and their mortgage notes can be ripe assets to be acquired at discounts. With the right positioning as annual rentals or government subsidized housing they may prove incredibly profitable for new owners who take them over in 2021. 

Investment Opportunities

Find out more about investing in secured debt and real estate, go to NNG Capital Fund

Image by Jens Neumann from Pixabay