US CRE - Delay and Pray

I want to start this piece by stating that the irony does not escape me. I am sat at my kitchen table, about to take a hatchet to the US Commercial Real Estate (CRE) market because I can’t concentrate in the office. Unthinkable pre-pandemic, but the impact of Covid has been plain to see.

Barely a day goes by where Bloomberg isn’t reporting on some East coast office block in distress - and it’s not just office. Covid has had a notable impact on every segment of this market: freshly built multi-family apartment blocks stand empty in theUS Sunbelt as landlords struggle to fill them amid an exodus back to places like New York or LA; huge logistics warehouses similarly bereft as consumers rediscover shops exist outside their laptop; hotel owners sitting smug as tourism returns with its pre-covid vigour amid no new supply.

As with all things, the effect of hindsight is paramount. Why didn’t we see this coming? In this thought-piece I will put forward the argument that the allure of yield in a zero-rate environment created a distorted lending marketing US CRE, and that as these loans come due, there will be a tremendous opportunity for specialised managers to restructure loans originated in the covid era.