Banks and other financial institutions that are moving quickly to clean up their balance sheets in the wake of Covid-19 disruption are likely to be in a better position to take advantage of near-term mergers and acquisitions opportunities, according to a recent REFI US webinar with Kingsley Greenland, the CEO of DebtX.
There’s a strong connection between a financial institution’s ability to get their balance sheet in order and their ability to make acquisitions. This means that institutions could launch bulk asset sales before the end of the year.
“We think that banks will be under pressure to try and address the problems that are arising this year so that they can enter into M&A mode,” Greenland said. “They understand that through the 2008-2010 era, those folks who cleaned up their balance sheets quickly and restored their capital ratios, were able to be the first out of the gates and they’ll have a stronger balance sheet and a better stock price to be able to do it.”
The webinar, held on May 12, was viewed by a wide swath of senior commercial real estate executives in the US, Europe and beyond and included a vibrant question and answer period that tapped into Greenland’s experience navigating past downturns, debated whether companies will continue to need the amount of office space they currently have, and what will happen to the properties that were struggling prior to the pandemic.
Indeed, it’s Greenland’s view that properties that were in trouble prior to the pandemic will continue to struggle. “These assets are not likely to get better as a result of the pandemic. They’re going get worse,” he said.
Buyers getting ready
DebtX has seen a significant increase in interest from potential buyers for its marketplace. The company is not yet seeing banks on the buy-side, with Greenland noting that these lenders are looking inward to deal with their internal issues.
“We’ve mostly seen funds, a lot of smaller private equity firms, and family offices,” Greenland added. “We’ve seen a significant increase in folks who are qualifying to do business in our marketplace — the number went up threefold right after the first two weeks and it’s doubled again since then.”
Commercial real estate is also seeing additional interest from investors simply because of its nature, Greenland added.
“The beauty of commercial real estate is that it’s an underlying asset,” Greenland said. “So if you’re in these troubled times and you’re really wondering about everything in the stock market or the bond market, you might find that with underlying assets like commercial real estate, you can set a floor for yourself as to where you think the downside will be. It does become a preferable asset class to invest in during these times.”
Although commercial real estate assets have not yet seen a massive repricing, this is partly a function of government support that’s being put into place. “You’re not seeing the cash flow of the underlying asset deteriorate yet,” Greenland said. “We’re expecting to see that in 90 days when some of the forbearance agreements wear off and you start to see the underlying tenants express their stress to the landlords. I think you’re going to see a pretty precipitous drop.”
Comparisons to previous downturns
One of the key differences between what’s going on now and what happened in 2008 in the length of the recovery.
“I think what you’re going to find is a very, very prolonged downturn where it’s going to take a long time for the market to get back to where it was,” Greenland said. “Whereas in 2008, the markets were able to reset relatively quickly, in roughly a year-and-a-half. I think this is going to be much longer than that — it could be as long as two years or maybe even longer.”
The question of valuation is a tricky one, with Greenland noting that changes in the cash flows of underlying assets will have a significant impact. Additionally, tenants’ needs are going to change going forward, which will also affect valuations.
“I look at myself, I look at my office space and I see how many of my folks are working from home and I wonder, ‘How much office space will I need going forward?’” Greenland said. “That conversation is going on thousands of times a day around the world right now and will impact commercial real estate values.”