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After a super volatile and downright tough year for commercial real estate (CRE), investors are looking ahead to 2021 in hopes for a more stable and prosperous year. While things are looking up for the commercial real estate sector after the release of the COVID-19 vaccine, CRE investors aren't out of the woods yet. Here are three things CRE investors should know in 2021 to help them make informed investment decisions and prepare their portfolio accordingly.
Affordable housing will be a priority in 2021
Affordable housing has been a growing concern for years. Small-scale efforts and policies have been enacted on local or statewide levels, but very few programs exist nationally to get investors to increase the development of affordable housing. But that seems to be changing.
The Federal Housing Financing Agency (FHFA) recently disclosed lending guidelines for the popular multifamily loan programs from the government-sponsored entities (GSE), Freddie Mac (OTCMKTS: FMCC) and Fannie Mae (OTCMKTS: FNMA), for 2021. The new lending is capped at $70 billion for each entity, with half of all funding focused on affordable housing and affordable business, including 20% of the affordable business being required to include 20% of rentable units at or below 60% of the area median income (AMI).
Investors looking to buy, convert, or develop multifamily real estate in 2021 should consider adding affordable housing to the project, even if it's just a portion of the property. Doing so can increase the likelihood to be approved for long-term financing while helping to increase supply of an asset in high demand.
Distressed CRE loans and discounted asset sales will rise
According to a recent Bloomberg report, 20 large real estate companies, two of which own more than $50 million in assets, have filed bankruptcy by December 2020. This is in addition to the 236 other companies that have $50 million or more in liabilities who also filed Chapter 11 bankruptcy in 2020, the highest number in a given year since 2009. According to a recent Standard & Poor's (NYSE: SPGI) credit brief, there were $45.33 billion commercial mortgage-backed securities delinquent in the third quarter of 2020. And CoStar Group (NASDAQ: CSGP) estimates there will be more than $126 billion of distressed commercial real estate being sold in a flash sale between now and 2022, or as much as $321 billion in sales by 2025, as delinquencies rise.
A lot of companies have been dipping into their credit lines, restructuring debt, or commencing sales of loans to help meet financial obligations as they wait for the market to resume to normal. But sectors like office, retail, hospitality and entertainment, as well as multifamily property in high-density metro markets, have a long way to go before things balance back out. All this means distressed sales can, and likely will, increase in early 2021 as more companies have difficulty meeting their debt obligations.
Having the funds available to acquire discounted real estate during this time could pay off handsomely in the long run. Keep an eye out for value buys for real estate investment trusts (REITs) if you're looking for a more passive investment.
Be prepared for more uncertainty
If you can't tell by now, 2021 seems to be falling in line with the themes of 2020: uncertainty and volatility. There's a good chance some sectors of CRE will see a strong resurgence as people gain the freedom to travel and patronize businesses in a safe manner, but concern over a new, more transmissible strain of coronavirus could perpetuate the problem, causing continued closures and reduced sales.
Investors should prepare for the worst while hoping for the best and adjust their portfolio and investing technique accordingly. Right now, liquidity and cash is king. Those who have the financial ability to maintain operations through tough times or can acquire discounted property in 2021 will fare the best.
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