Office, retail and education conversions hold the most
promise, but investors will need creativity and patience to
maximize ROI, advises A&G's Christian
Koulichkov
NEW
YORK, May 8, 2024 /PRNewswire/
-- Distressed investing will be a prime focus in commercial
real estate in 2024 and beyond, with the office market continuing
as the largest source of stress, advised a real estate sales
veteran from A&G Real Estate Partners.
Writing in the Turnaround Management Association's Journal of
Corporate Renewal, A&G Real Estate Sales Managing Director
Christian Koulichkov points to
buying opportunities in office, multifamily, mixed-use, and
hospitality properties due to a "perfect storm of maturities,
increased borrowing costs, tighter lending standards, and reduced
cash flow."
In his Featured Article for JCR's May issue ("Adapt &
Thrive: Innovative Strategies to Overcome Real Estate Distress"),
Koulichkov notes that properties all over the United States are in a pickle as a result
of pre-Covid business decisions.
"Imagine a borrower that bought an underperforming mid-size
office building in a top 20 market in 2019 with plans to reposition
the asset to attract new higher-paying tenants by changing floor
plate layouts and adding tenant amenities to boost rents," he
writes. "The game plan would call for a high-leverage 5-year
interest-only loan with the goal of refinancing the debt long term
when the note came due in 2024 based on the increased occupancy,
rent rolls, and a higher valuation. Post pandemic, that borrower is
struggling to fill the space with the desired tenancy, and their
loan is underwater making a traditional refinance impossible."
While today's investors have "enough dry powder to fill the back
bowls of Aspen, Sun Valley, and
Jackson Hole multiple times over," Koulichkov continues, in many
cases, their best option will be adaptive reuse—conversion projects
that are "not always linear and can require community buy-in, a
rezoning process, and a capital base that will allow for reasonable
timelines."
For example, public-private partnerships and rezonings are
essential to making proformas pencil out in office-to-residential
conversions, writes Koulichkov, who boasts more than a decade of
experience in selling assets in and out of bankruptcy.
The executive cites the successful conversion of a
525,000-square-foot, 1970s-era office building at 160 Water Street
in New York City's Seaport into
588 residential units. An opportunistic investment firm "purchased
the building in 2022 for $272
million," he explains. "At $518 per square foot, this price is heavily
discounted versus replacement cost and an example of an adaptive
use triumph."
In retail real estate, reuse opportunities include backfilling
vacant anchor spaces with the likes pickleball courts, self-storage
facilities, daycare/early education centers or residential
buildings.
Meanwhile, higher education faces a demographic cliff and is in
a serious economic predicament. "These failing institutions are the
next big land grab in the U.S. because many of them sit on prime
property in major metropolitan areas," Koulichkov notes.
Two recent A&G deals in New
York illustrate the potential for adaptive use to benefit
this sector. Koulichkov points to The College
of New Rochelle, which sold in bankruptcy and was converted
by the Freemasons into senior housing, community space and a
TV/film set, and Cazenovia College in
New York, which now houses an
auxiliary academy for the state police.
In the piece, he observes that regional banks exposed to Class B
and C office and multifamily loans are now struggling to stay
within FDIC regulated thresholds and that the maturity wave also
will affect the CMBS market, adding to commercial real estate
distress.
"The smart money has been building a war chest and waiting for
the maturity tsunami to flood the market with opportunity,"
Koulichkov writes. "The amount of capital chasing these deals will
be fierce and unprecedented."
In this environment, the right move might just be to convert a
college campus into senior housing, an overlooked office building
into downtown apartments, or a former Bed Bath & Beyond into
pickleball courts. "These imaginative solutions," Koulichkov
concludes, "can provide the distressed investor with a valuable
edge" in producing higher cash-on-cash yields.
The full article is available at:
https://turnaround.org/jcr/2024/05/adapt-thrive-innovative-strategies-overcome-real-estate-distress
Media Contacts: At Jaffe Communications,
Elisa Krantz, (908) 789-0700,
377415@email4pr.com
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SOURCE A&G Real Estate Partners