Commercial real estate firm Stream Realty Partners has created a division advising clients that are unintentionally increasing their real estate portfolios: lenders.
The Dallas-based firm formed Value Preservation Advisors. The practice is focused on maintaining the value of properties, seized by banks from developers and real estate investors, that have been unable to weather a combination of low demand for corporate space, higher interest rates and low liquidity in capital markets.
The move reflects a bet by Stream and some other industry professionals that even more properties across the United States could fall into distress and end up owned by lenders. Real estate loans estimated at nearly $2 trillion are coming due in the next few years, meaning that financiers could be spending more time worrying about building maintenance and improvements as well as their traditional business of figuring out what loans to make.
To that end, Stream plans to bring in its local market experts to help banks decide how best to reduce the loss on a distressed property. Evaluations can lead to various next steps for lenders, ranging from an immediate sale to a yearslong re-leasing effort or a change of uses such as to residential or a hotel.
“We've formed a team to address a trend we're seeing in every market, and we believe that we can be a strategic adviser to a lot of these lenders,” said a team member, Adam Showalter, who also is the firm’s managing director of national office investor services. “It’s really just in reaction to the increase in defaulted loans over the past 12 months, which is forcing lenders to act.”
Stream's value preservation division, already working with multiple clients, was created by demand from lenders, a type of business that often lacks dedicated asset management professionals to try to turn around distressed buildings. The largest focus will be on the hard-hit office sector.
Rather than immediately selling a building taken by foreclosure or voluntary forfeiture and writing down a massive loss, some lenders are seeking alternatives to minimize the losses on loans made on office towers throughout the country, said Showalter, who is based in Chicago.
Loans Maturing
Nearly half of the $4.7 trillion commercial real estate debt market is set to mature by 2026, according to a CoStar analysis. The largest amount of outstanding debt is related to office property, a sector that has been hit hard by remote and hybrid work trends and corporate cutbacks.
Those factors, as well as rising interest rates, have left some office owners around the country unable to keep up with mortgage payments or unable to refinance properties as large loans taken out before the pandemic mature.
The wave of looming loan maturities is being closely watched by real estate executives, including heads of the largest brokerages.
During a call with analysts in May, Newmark CEO Barry Gosin talked of the opportunities that maturing debt will create, opening the door to “more bespoke, unique, creative solutions” for borrowers and lenders to avoid foreclosure.
“We are at the beginning of a once-in-a-generation opportunity for Newmark to grow its business,” Gosin said, according to a transcript of the call. “There is a record $929 billion of U.S. commercial and multifamily mortgage maturities due in 2024 and $2 trillion over the next three years. We estimate that approximately one-third of these maturing loans are likely to result in a loan sale or property sale. One-third will need assistance with restructurings and/or recapitalizations. And one-third will likely require an adviser to help find new lenders.”
Stream was approached by lenders to create the lender-focused team because of the firm's mix of development and asset management expertise and brokerage services, such as teams of office leasing professionals, Showalter said.
The firm’s evaluations “are not too dissimilar to if we bought an asset ourselves,” Showalter continued. “The difference is that these banks didn’t make these loans with the intention of owning the properties.”
Stream will outsource property sales to brokerages with capital markets teams, Showalter said.
A hold of three to five years could mean a massive investment by a lender already facing a big loss. However, if an investment of millions of additional dollars can significantly reduce a lender’s loss, some banks are willing to play the costlier long game, Showalter said.
Initial Projects
One of the practice's first projects is the 60-story Comerica Bank Tower, one of the tallest buildings in Dallas.
After lender Slate Asset Management took possession of the skyscraper from previous owners TriGate Capital and Pacific Elm Properties, Stream professionals have begun helping the lender-turned-owner weigh options.
That could include following through on the previous owners’ vision to convert a large block of the Philip Johnson-designed tower into apartments.
At least one other development and real estate services firm, Lincoln Property Co., formed a similar practice earlier this year. The Dallas-based company named Michael Bernstein to lead what it describes as a special situations and lender advisory firm.
Showalter said he expects others, including major commercial brokerages, to follow suit.
“We expect this to be a significantly sized business in all markets,” he said. “I don’t think any market is immune to this. We're a first mover. I think all of the brokerages will do this.”
For the Record
Stream's Value Preservation Advisors practice is led by Adam Jackson, the firm's chief investment officer; John Rogers, executive managing director of investment management; Adam Showalter, managing director of national office investor services; Alex Roberto, senior vice president of investment management; Ramsey March, executive managing director of office and development services; Kyle Valentine, executive managing director and Houston market leader; and Patrick Russo, executive managing director and Chicago market leader.
CoStar News reporter Randyl Drummer contributed.