Blumberg Joins Rush of Property Firms Raising Funds for Distressed Deals
Company to raise $1 billion next year to buy high-quality office buildings; ‘It will be the best buying opportunity since 2010’
Blumberg Capital Partners is joining the growing number of real-estate investment firms raising capital in anticipation of a wave of distressed commercial properties hitting the market as a result of the pandemic.
The company, based in Coral Gables, Fla., is planning to raise $1 billion next year to buy high-quality office buildings primarily in Florida, Texas and other states with low taxes and costs of living compared with states like New York and California. The fund managed by Blumberg’s American Ventures division will be the company’s fifth distressed fund since 1992 but the first one it has raised in the past decade, according to Philip Blumberg, founder and chief executive.
“In this market we expect discounts of up to 35%,” Mr. Blumberg predicted. “It will be the best buying opportunity since 2010.”
Numerous other investment companies also think that historic opportunities await because of the havoc wrought to the commercial property market by the pandemic. Their thinking is that prices will plummet because fear of contagion has kept people away from malls, airports and office buildings.
Other companies that have raised or are raising distressed funds include KKR & Co., Kayne Anderson Real Estate and Terra Capital Partners. Heavyweights like Brookfield Asset Management and Starwood Capital Group are sitting on billions of dollars in cash and capital commitments that could be used for that purpose.
So far, there have been few distressed property deals in the nine months since the pandemic hit. But that isn’t surprising this early in an economic downturn, analysts say.
Distressed sales didn’t start until more than one year into the financial crisis of 2008 and didn’t reach their peak until mid-2010, according to data firm Real Capital Analytics Inc. “It’s not something that happens overnight,” said Jim Costello, a Real Capital Analytics senior vice president.
Signs are growing in the current crisis that landlords owning billions of dollars worth of commercial property are having trouble paying their debts. In November, 8.2% of loans that were converted into commercial mortgage-backed securities were 30 days or more delinquent, compared with 2.3% one year earlier, according to Trepp LLC.
Stress also is showing at banks, by far the largest commercial-real-estate lenders. The risk ratings that banks assign to commercial-property loans have been steadily rising, particularly for loans backed by retail and hotels, representing a deterioration of credit quality, according to a Trepp analysis.
“Thirty percent of lodging loans are now in categories which have risk ratings indicating that banks expect some level of loss,” said Russell Hughes a Trepp vice president, in an email.
Loans backed by office buildings have performed better than retail and hotel loans during the pandemic. Office tenants typically sign leases of at least 10 years and most have stayed current on rent even if most of their employees have been working from home.
But Mr. Blumberg pointed out there are signs of distress among office building landlords as well. Tenants are dumping millions of square feet of sublease space on the market in many cities, putting downward pressure on rents, he noted.
“It’s going to be a tough year for landlords this coming year,” Mr. Blumberg said.
The new Blumberg fund will seek to buy properties with values of more than $50 million that are priced below what it would cost to replace them with new development. It will target markets in Sunbelt states that will benefit in the coming years from increasing demand from tenants leaving higher-cost states, Mr. Blumberg predicted.
“We anticipate that trend continuing for years,” Mr. Blumberg said.
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