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Market Outlook and Limiting Liability for Distressed Properties

According to the Houston Chronicle, an estimated $126 billion in commercial real estate will be sold at distressed prices through the year 2022, according to data provided by CoStar Group, Inc (CoStar).  Following the battering of real estate and rental properties from the COVID-19 pandemic, most of these distressed properties have not come to market yet because either (a) banks are hesitant to foreclose, (b) rent prices have not dipped enough, or (c) federal funds under the Paycheck Protection Program (PPP) have kept property owners from going under. That is expected to change in 2021.

Distressed hotel, retail, office, and other real estate properties will continue swell the market over the coming five years, potentially reaching $321 billion in sales by 2025; this total may swell to well over $659 billion in a worst-case scenario, according to CoStar.

The effects of the pandemic have been felt across a wide swath of the real estate industry. In the nation’s hotel industry, more than 962 million room nights went unsold through last week, which is roughly 46 percent more than all unsold nightly rooms in 2019. Based on an average rate of $131 a night, hotel owners have seen roughly $46 billion in lost revenue in 2020.

These financial impacts are just a small snippet of larger concern for assets in the banking and real estate sectors. Thousands of distressed properties will start to move and transfer ownership over the next 2 years, and will spark discussions centered around due diligence, capital costs, and liability protection for lenders, owners, and buyers.

Given the impact to the real estate industry from the pandemic, the question becomes, how can lenders and buyers limit liability and ensure protection?  Due diligence on environmental concerns and building conditions is the best way to start potentially limiting liability associated with a property transaction process, especially when you know the distressed asset has equity that is worth the risk to contract. 

Braun Intertec Corporation has a long history of providing lenders and buyers with Phase I Environmental Site Assessments (ESAs) to help limit environmental liabilities and unknowns associated with the properties, as well as Property Conditions Assessments (PCAs) to help quantify the unknowns from distressed buildings and assets that may have sat vacant and unused for some time. Additionally, Braun Intertec Corporation can help to provide business risk reporting and business continuity planning where needed on acquisitions of distressed business properties.

Andrew “Andy” Adams, CHMM, MBA Vice President

P: 713.401.0852