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Bankruptcies Paint Bleak Picture of the Real Estate Market in Q1

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The consequences of last year’s disastrous slowdowns have been slowly coming in. According to Bloomberg, bankruptcy filings are at the highest they have been since 2009, with concentrations in energy, retail, consumer services, and real estate companies. [1] While companies, both large and small, have suffered, the bankruptcies of large corporations (often household names) especially signals the dire scenario facing these industries. Chapter 11’s from large companies are pouring in, with the most recent figures indicating 244 large companies seeking protection from debtors. [2] Only 2009’s recession surpasses this, with 293 large companies — companies with assets over $50 million — filing. [3] 

Of those which filed last year, twenty were from the real estate sector, a foreboding number. It cannot be put any other way: the situation for these firms — and, arguably, the industry at large — is dire; and it’s going to get worse before it gets better. Chapter 11 filings are “expected to spread as landlord concessions like rent abatements run out,” resulting in a loss of not only cash on hand but clientele, as well. [4] As we still have months to go before reaching herd immunity, it is unfortunately the case that we will see this continued uptick in bankruptcy, barring any significant federal assistance.

Significant lags in cash flow and large amounts of debt pledged against assets help explain the situation as it currently is. Many large firms have seen a rapid depletion of cash on hand, even if they have managed to keep contract activity up. As of January, “5.2 percent of mortgages, or 2.7 million, are in forbearance… [which] represents $547 billion in unpaid principal,” The Wall Street Journal reports. [5] Further, distressed debt — securities of defaulted, bankrupt or near-bankrupt corporations — has continued to rise in the sector from March peaks. Unlike most other sectors, in which distressed debt gradually fell through 2020, distressed debt in the real estate sector has gone up 4% since then. [6] Bloomberg reports that more than $160 billion in distressed commercial-property sales took place in 2020 alone, with more certain to occur in 2021. [7]

However, despite this bleak picture of real estate in 2021, there remains hope for the real estate sector yet. With respect to the residential sector, home sales actually went up in 2020 (though, as we’ve covered, not in Manhattan). Low mortgage rates and a lack of homes offer the primary explanation for the mid-pandemic uptick. House valuations increased accordingly. For property owners and landlords alike, should they be able to weather the current storm, this is promising. The new sales and heightened property values together should prompt a cash flow that will help prop up the struggling sector. 

Further, and of course, widespread vaccination is key. With the rollout underway, corporations are quickly preparing restructures to capitalize on the burst of economic activity reaching herd immunity will prompt. Again, for those that can make it through to then, the numbers are promising. This will especially be the case when contract activity returns to pre-COVID averages in Manhattan, whose large firms have taken the brunt of the economic fallout in the sector.

Until then, firms are hoping that dwindling investor uncertainty and federal and state assistance will spark cash flow increases large enough to get them through to the so-called return to normal. 

Sources:

[1] – Hill, Jeremy Hill & Doherty, Katherine, “Pandemic Spurs Most Bankruptcy Since 2009,” Bloomberg, 5 Jan. 2021, https://www.bloomberg.com/news/articles/2021-01-05/u-s-bankruptcy-tracker-pandemic-spurs-most-filings-since-2009?srnd=premium, accessed 12 Jan. 2021.

[2] – Ibid.

[3] – Ibid.

[4] – Saul, Josh & Doherty, Katherine, “U.S. Bankruptcy Tracker: Real Estate Dominates Filings Flurry,” Bloomberg, 15 Dec. 2020, https://www.bloomberg.com/news/articles/2020-12-15/u-s-bankruptcy-tracker-real-estate-dominates-filings-flurry, accessed 12 Jan. 2021.

[5] – Orton, Kathy, “Experts predict what the 2021 housing market will bring,” The Washington Post, 11 Jan. 2021, https://www.washingtonpost.com/business/2021/01/11/2021-housing-market-predictions/, accessed 12 Jan. 2021.

[6] – Op. Cit. n4.

[7] – Op. Cit. n4.

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