History can be instructive. During the 1990s savings and loan crisis government regulators strongly encouraged lenders to dump troubled assets, which they did – many at deep discounts. As a result, savvy investors were enriched.
The financial crisis of 2008 took place in a very different regulatory environment. This time around the regulators have backed off. They wanted to prevent the hedge fund investors from making another killing at the expense of the lenders. There was no wholesale push to sell assets. And in fact many of those troubled assets have turned around and are now back on track.
While delay and deferral has turned out to be a successful strategy, we believe that the time has come to tackle those thorny problems. Despite recent upticks, interest rates are still at historic lows, lenders are more open for business than they were in the years immediately following the financial crisis and many developer/owners are enjoying the strongest financial condition they have experienced in recent years.
Meanwhile, regulatory pressure to address distressed loans remains relaxed, allowing lenders to liquidate troubled assets at their discretion. Accordingly, there are opportunities for owners and lenders which may not last for long. At some point, the Federal Reserve is going to pull back on quantitative easing. Once that occurs interest rates will likely increase which will put pressure on capitalization rates. These likely trends will cause real estate values to decline and ultimately make restructurings and refinancings significantly more difficult.
So, are we nearing the “end of pretend”? How will troubled assets be addressed once interest rates rise to historic norms and terms erode? In a less friendly regulatory environment will lenders be forced to simply foreclose and engage in fire sales as they did in the early 1990s? Now is the time for owners to contact reluctant lenders and bring them to the table. Lenders need to be convinced that it is in their best interest to restructure troubled assets now, before this historic opportunity passes them by.