Interviews

Distress and Opportunities in the Commercial Credit Markets

Spencer B. Haber, CEO, H/2 Capital Partners LLC
April 6, 2015

Spencer B. Haber, the CEO and Chairman of H/2 Capital Partners and Chairman-elect of the Zell/Lurie Center's Advisory Board, recently sat down with the Martin Bucksbaum Professor of Real Estate, Finance and Business Economics & Public Policy, Nancy A. Nasher and David J. Haemisegger, Director of the Zell/Lurie Real Estate Center, Joe Gyourko to discuss distress and opportunities in commercial credit markets

Overview

• After the Great Recession, distress in the commercial debt markets was substantial, but not widely reported
• Borrowers largely remained in control of their assets, but deleveraging produced opportunities
• A wave of maturing loans should provide another distressed/deleveraging opportunity in the coming years
• Haber sees opportunities due to bank deleveraging in Europe and distress in China, but worries about the opaqueness of investing in China

Executive Summary

Spencer B. Haber, the CEO and Chairman of H/2 Capital Partners and Chairman-elect of the Zell/Lurie Center's Advisory Board, recently sat down with Wharton real estate professor Joe Gyourko to discuss distress and opportunities in commercial credit markets. Opportunities in distressed commercial real estate debt abounded after the financial crisis and the Great Recession, Haber said, and should continue through the next few years. However, the distress has not been in the form that investors had become accustomed to seeing in prior real estate cycles and, as a result, has not garnered the same publicity as in prior cycles. After the Great Recession, distress in the commercial debt markets was substantial. The commercial mortgage delinquency rate reached 9 percent of outstanding loans, well above the typical rate of 1 percent. Nonetheless, the distress in the commercial real estate debt markets was overshadowed in the mass media by the even more visible--and impactful for the ordinary person rather than the professional investor-- distress in the residential mortgage markets. The distress in the commercial debt markets provided opportunities from 2009 into 2011 for those investors with access to capital, Haber said. However, the nature of the distress was different than in prior real estate cycles. Borrowers largely remained in control of their assets instead of financial institutions unloading them. These borrowers needed to reduce the leverage on their properties and that deleveraging produced opportunities. Haber expects the wave of maturing legacy loans--more than a trillion dollars of 10-year mortgages that were underwritten in the 2005-2007 period--to provide another distressed/deleveraging opportunity over the coming years. Internationally, Haber sees opportunities in Europe. The European commercial debt market is smaller than in the U.S., on the order of a trillion Euros, but it is "still a meaningful cohort" with tens of billions of Euros of distressed debt. Haber expects these opportunities to continue over the next half-decade due to European borrowers de-levering and European banks shrinking their balance sheets. In China, while Haber expects significant distressed opportunities over the next five to 10 years, he worries about the difficulty of working through "the opacity of the Chinese financial markets and institutions."

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