Sell Now or Forever Hold Your Piece (of property)

Over the last year, property owners have experienced one of the greatest hardships in the history of this country. Between the unprecedented pandemic, and the politics that have followed, landlords find themselves in difficult situations, making decisions they never thought they would have to make. As the country starts to open back up and restrictions have decreased, it has left many people questioning what happens next. Does everything go back to where we left off pre pandemic or does the ripple effect that follows become a new challenge landlords will have to face?

One of the most vulnerable pieces of the current financial system are banks and lenders. Due to the pandemic, they were hit hard as the economy shut down and tenants were unable to pay rent. Landlords struggled to make mortgage payments forcing banks to offer forbearance agreements, which structured payments owed to be paid at a later date. However, as the pandemic has continued on longer than anyone could have imagined, those deals have passed leading to defaults and accumulating interest. Another concern the banks will have to deal with is the maturing high Loan to value Loans. There is no question the pandemic, due to tenant hardship, vacancies, and overall investor’s comfort with risk, has hurt commercial property values in New York. As a result of those values coming down along with new strict bank regulations such as escrowing hold backs for the pandemic, the high LTV loans that are coming due will not be able to be refinanced. Both accumulating default interest and the inability to refinance, will cause many distressed sellers in the market place. This is concern for all sellers as the competition for strong investors looking to purchase properties will drive values down. Sellers will not only be negotiating with buyers but property owners in their own submarkets looking to sell similar assets.

Many sellers have also taken the position of waiting until the pandemic is over and things start to get back to normal. “The pandemic” declining values have prevented owners from taking action and settling for lower price points. The new government administration continues to discuss capital gains increases and the removal of 1031 Exchanges. If these policies are approved and put into place for the 2022 tax year, sellers are hit with another challenge and will have to make a difficult decision. If owners decide keep their buildings afloat, holding off to sell until the market gets “better”, they may be faced with the possibility that if they wait too long the increased value they are hoping for will be taken away after the sale in the form of taxes. These polices could be set in place for the foreseeable future causing this tax structure to be a new standard in the industry.

The hardships placed on the real estate industry; one of the foundations on which this country was built has put many landlords in a difficult position. They have fought their way through this pandemic looking for a light at the end of the tunnel. However, the ripple effect that will come out of the pandemic will affect the commercial real estate market for years to come. With the banking system potentially forcing a market wide reset and the current tax structure being taken away, sellers are losing value by the day. If sellers do not sell now, the current property value may not return for a long time.

 

Author: Ryan Lewis, Senior Advisor