A conversation with Proskauer Partners and PERE Editor Evelyn Lee on the factors impacting commercial real estate since the start of the Covid-19 pandemic.

Evelyn Lee: About three years into the pandemic, we have yet to see distress emerge in a larger scale way.  People say the reasons for that is unlike before the GFC, there hasn’t been a lot of overbuilding. There’s been more conservative lending and interest rates have been low, so the cost of debt has been low. So what do you say in response to that?

Steve Lichtenfeld, Private Equity Real Estate: Not to sound like a therapist, but there’s a lot to unpack there. To think about what’s happening today, you have to take a step back and say, "What did the pandemic do to commercial real estate?" There were certain macro trends that were happening pre-pandemic that were accelerated as a result of the pandemic. 

What were people doing  in response to that? I think that we saw that people were buying what I call beds.  So what were beds? Beds were multi-family and they were single-family rentals. They were buying sheds, which was industrial self-storage and data centers. Then they were buying life sciences because of the demand for pharmaceuticals also accelerated by the pandemic.

So what were the kind of losers when you think about some of those things? Some of the losers were office, but it depends on the office. The class A, highly mediatized office has done great and has really attracted the top-end tenants. It’s some of the older buildings – the class B, class C – that are having trouble attracting the types of tenants that they need to. It was central business district hotels, just because business travel was reduced. Then there has been retail that has been obviously impacted. So those trends and the distress you may see, are in some of those assets that I mentioned and not in some of the others that have performed really well and have been a great hedge against inflation.

Vincent Indelicato, Private Credit Restructuring: I think the constant in some of Steve’s market observations over the last two years has been just uncertainty. The unpredictability on consumer behavior that this unprecedented pandemic created, I think on balance, gave a lot of investors pause and I think certainly with respect to high-quality assets, predisposed lenders to offer concessions to sponsors that enter into forbearance agreements that I think only now are starting to end. And so the trend of just kicking the proverbial can down the road or amending and pretending might change very quickly as those forbearances expire and sponsors, lenders and servicers have very honest conversations about the future of the assets.

Jeff Marwil, Business Solutions, Governance, Restructuring & Bankruptcy: There was a lot of patience by lenders and by landlords during the pandemic period. Following that, those sectors have started to rebound. Also following the pandemic, there have been huge increases in housing prices and housing starts. So you have asset bubbles, I think in at least those two sectors, if not others. And, just as the real estate sectors are starting to come back and to regulate, the interest rates are going up, and they’re going up quickly, and it looks like they’re going to go up very aggressively in a very short period of time. That may impair the ability of those sectors to really rebound. And, the interest rate rises look like it’s going to impact housing because it’s more expensive to get a mortgage now and will continue to be more expensive, and it’s impacting the stock market for sure. 

Steve Lichtenfeld: I think what has happened now that we’ve come out of the pandemic – and I like to think that we’re now in an endemic – that people have solidified their thinking, "Okay, this is what the world will be today. This is what the world is going to be for the next couple of years."

So I think given the fact that this is not a mystery anymore, that people can now underwrite and evaluate what the cash flows are going to be going forward on that basis, they have more solid thinking about what they’re underwriting.