Distressed Debt Monitor: CBRE’s Patrick Connell on the Role of Receiverships

2021 and beyond looks to be a marketplace defined by haves and have-nots with significant property type performance divergence both within and across property types. MBA Newslink interviewed CBRE’s Patrick Connell for some perspective on downturns and the role receiverships play in navigating the path to recovery.

Connell, Global Account Executive for CBRE’s Global Client Care group, also serves as the Executive Sponsor for the firm’s U.S. Receivership Platform. Based in the Washington, D.C. market, Patrick oversees the global account management for several top institutional and private equity investor clients across all CBRE service lines. His experience in capital markets and asset management is derived from employment in CMBS special servicing, private equity and institutional advisory.

MBA NEWSLINK: Receivers are court appointed to oversee a property’s operations when a property and landlord have trouble maintaining the debt obligation. What exactly does a Receiver do, and what’s important to being successful in this role? 

PATRICK CONNELL: As the name implies, a Receiver is a court-appointed individual or company (depending on the jurisdiction) whose primary duty is to receive income from the property as a neutral third party reporting to the court.  The applicable statutes or the court order which appoints the Receiver usually give specific power to the Receiver to operate, manage and conserve the property. This generally includes the specific authority to secure tenants, collect rents, insure the property against loss, employ staff to operate the property, address fire/life safety concerns and to pay taxes which become due on the property. 

Solid business acumen and experience are a necessity to serve as a Receiver for commercial real estate assets. The Receiver should be well-versed in the specific property type, possess a strong background in financial reporting and understand borrower and lender dynamics. Successful execution on risk prevention, asset stabilization and understanding what constitutes meaningful value creation are vitally important.  

NEWSLINK: The pandemic upended business plans for retail and hospitality assets in markets across the country. What have you seen in terms of receivership assignment demand in this environment? What’s your expectation of the demand curve going forward?

CONNELL: Across all property types, Real Capital Analytics reported $146 billion in distressed and potentially distressed property at year-end 2020. Distressed sales have been limited thus far and accounted for just 1% of total transaction value in Q4 2020. This is a promising sign that widespread distressed sales may be avoided, especially if pandemic restrictions ease and economic growth improves in the second half of 2021.

Of those sectors impacted, retail and hospitality have been hit the hardest across all geographies due to travel restrictions, impacts on space utilization and jurisdictional stay-at-home orders. These sectors continue to be a major topic of conversation on calls with CMBS servicers, banks and debt funds.

Consequently, demand for receivership services in these sectors, particularly with mall and large-box retail properties, continues to increase. This activity is further supported by the continued outreach and requests for Broker Opinions of Value (BOVs) received by our Capital Markets professionals in our Loan Sales and Investment Sales platforms.   

Delinquency rates for both sectors will remain elevated, resulting in lenders dealing with distressed loans and possible receivership appointment well into 2022. Known factors impacting the demand curve are federal and state policies on shut-downs, mortgage forbearance, eviction moratoriums and additional stimulus to both business and the consumer. 

Timing and efficacy of the vaccine delivery will set the stage for a return to normal, while the delivery of goods and services continues to evolve and a return to the workplace firms up. These factors also will have a drastic impact on not only these sectors but bifurcation within the sectors with winners and losers. As an example, large-format malls were struggling before the pandemic and the challenges have only been accelerated during this period, while industrial has outperformed with increased demand for last mile delivery.

The economic outlook for these two sectors is summarized below from the Top Takeaways for 2021 from CBRE Econometric Advisors:

Retail – Bankruptcies and store closures filled the headline news for retail in 2020 and it’s not going away in 2021. The e-commerce boom might have been industrial’s gain, but it was also retail’s loss. With the distribution of vaccines in 2021, we expect foot traffic to physical stores to rebound though not completely. Rent and availability rates are expected to deteriorate further as more retailers rethink their real estate strategy and the option of right-sizing their physical stores. However, the role of physical stores has evolved and will be geared more toward fulfilling consumers’ needs for convenience and experience.

Hotels – Hotels were the worst hit asset class in 2020, but the second half of 2021 promises a strong turnaround. Pent-up consumer demand for leisure travel will boost national occupancy to higher than 85% of 2019 levels by Q4. Businesses, keen to participate in events that allow their staff member to get to know clients and each other face-to-face once again, will resume corporate and conference travel. This will raise rate at an accelerating pace in the coming years.

NEWSLINK: Anything unique about the current appointment process or property management that one might not have experienced outside a pandemic? 

CONNELL: While the fundamentals for the appointment process for a receiver hasn’t changed, the COVID pandemic continues to have impact relative to court scheduling ability for foreclosure and receivership appointments. In terms of property management execution, COVID has had a significant impact on asset operations including but not limited to dedicated curb side pickup for retail, enhanced cleaning protocol requirements, delays in the supply chain and at times property staffing.

NEWSLINK: Receivers are an important player in the management of the distressed loan process. Any takeaways from the last downturn when you may have been just as likely to be the one hiring a receiver? 

CONNELL: Working with experienced real estate professionals who can leverage the substantial benefits of a vertically integrated and scalable platform creates efficiencies and accountability that allow secured party lenders immediate access to execution on all aspects of an asset’s stabilization, risk management, and potential value add initiatives.  Existing economic uncertainty and the impact on CRE make this more important now than ever.    

Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA Insights welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at msorohan@mba.org; or Michael Tucker, editorial manager, at mtucker@mba.org.