About ten years ago, huge private equity firms like Blackstone and Colony Capital saw a rare opportunity to invest and deploy billions of dollars of investment capital through the purchase of thousands of distressed single-family homes. By the end of 2013, three real estate investment trusts (REITs) existed with a market capitalization exceeding $4 billion, and the Blackstone Group finalized the formation of the world’s first bond backed by single-family rental streams.
Many of these were already REO homes in foreclosure. Almost a decade after this trend began, the jury is still out on whether single-family rentals (SFR) is a new asset class or a simple flip trade that will fade.
What Do REO Sales Look Like Today?
According to Attomdata, distressed home sales, including real estate owned (REO) sales, third-party foreclosure auction sales and short sales accounted, for 7.8% of all U.S. single-family home and condo sales in 2020, which is actually down from 11.1% in 2019. This low level is one-quarter of the peak of 38.6% in 2011 and marked the lowest point since 2005.
Where are distressed sales the highest? Again, Attomdata tells us that among 196 metropolitan statistical areas with a population of at least 200,000 and with sufficient data, those areas where distressed sales represented the largest portion of all sales, in 2020, were Chico, CA (18% of sales); Atlantic City, NJ (17.6%); Peoria, IL (16.8%); New Haven, CT (16.2%) and Norwich, CT (16.2%).
Among 53 metropolitan statistical areas with a population of at least 1 million, those with the highest levels of distressed sales in 2020 were Hartford, CT (15.5% of sales); Providence, RI (14.9%); Baltimore, MD (13.9%); Cleveland, OH (13.5%) and Chicago, IL (12.2 %).
A Commercial REO Forecast for 2021
With these insights, we looked into market data to help you make wiser investments.
As of Q2 2021, the industrial market has seen very little action in the way of distressed sales. On the other hand, the industrial/warehouse/logistics sector has been one of the most resilient sectors of the economy. Despite strong demand, the industrial vacancy rate has ticked up slightly, as completions outpace net absorption.
Asking rent growth is still in positive territory, as online shopping is bolstering strong demand for warehouses and distribution centers. Amazon, Walmart, Target, and third-party logistics operators continue to lead leasing activity.
Industrial capacities will likely be reshored, especially those concerned with healthcare or national security.
Distressed Hospitality, Retail and Office
Between March of 2020 and February of 2021, 8% of hotel sales involved a distressed asset. The total level of hotel transaction activity was only $10.6 billion of hotels traded, compared to $36.6 billion in the prior 12-month period.
In the 12 months prior to the end of February 2021, less than 1% of transaction activity in the apartment sector was tied to an asset purchased out of distress.
For office and retail, the percentage of distressed sales has risen but remains far short of the highs seen a decade ago.
RCAnalytics reported on April 5, 2021 that sales of distressed office assets totaled 1.3% of office deals over the last 12 months as compared to 2011 when distressed sales comprised 16% of the sector’s transaction activity. The hottest and strongest office markets in 2020 were Charlotte, Austin and Atlanta.
For retail, current period distressed sales accounted for 2.4% of volume, whereas this figure rose to a high of 12.8% during the last recession.
How Has COVID Impacted REO Sales?
Real Capital News noted there had been very little enforcement by lenders on borrowers in default so far. According to RCA, fewer than 1% of sales in Q4 2020 were of distressed assets. Distress as a percentage of total asset sales has remained below 5% of total sales since 2016, well below the more than 20% of total sales during the last peak year of distressed asset sales in 2010.
RCA reported outstanding distress, meaning troubled loans currently in special servicing, of $55.6 billion and potential distress of $90.5 billion as of the end of Q4 2020. Many institutional distressed real estate debt players are still waiting for that outstanding and potential distress to turn into buying opportunities.
What we do see from the numbers during the last crunch, which arose from the Fall 2008 Crisis, is that there was roughly a two-year lag from the inception of the crisis to the peak in distressed sales. So perhaps the best buying opportunities are yet to come.
Find Your Next REO Investment Property
Acquiring REO property can appear to be as simple as going on LoopNet or another REO listing service, finding a suitable property and making a bid. Of course, it’s usually a bit more complex than that, but hopefully the results of this analysis give you plenty of time to prepare.