Lightbox: Predictions of distress largely exaggerated in CRE’s hotel & retail sectors

As the summer shopping and travel season gets into full swing, the commercial real estate industry is closely watching the flow of revenue into the hard-hit retail and hospitality sectors. According to a Q2 2021 Investor Sentiment Report from LightBox, investors and their advisors are seeing promising indicators. This is translating to aggressive pricing for top-tier assets in both sectors and predictions of a spike in investment in the second half of 2021 and into 2022.

There remains a lingering sense of caution, however, and a look toward Labor Day when retail and lodging receipts will be tabulated; back-to-work and school plans will be underway; and there likely will be greater clarity concerning vaccination rates and variants. Aggregated, this is keeping significant capital on the sidelines and moving many investors into top-tier, low-risk assets.

The retail sector is navigating the challenges of e-commerce growth and physical store declines; it also is evaluating new concepts and experiential strategies, some born out of pandemic survival plans. The hotel sector is embracing the surge from almost unparalleled “emerging from the pandemic” spring and summer travel activity. Yet industry experts are more than anxiously awaiting the return of the all-important business and convention travelers. There is also a general consensus that a broader recovery will require an expansion beyond the ultra-safe assets into the wider pool of middle and lower tiered properties.

“The commercial real estate industry is skillfully navigating a complex set of challenges while at the same time seeing many positive signs of recovery and renewal at mid-year 2021,” said Tina Lichens, SVP, broker operations, LightBox. “The retail and hospitality sectors are poised for continued growth and transformation, yet are also the most vulnerable to continued upsets as the market stabilizes and investors make decisions about which asset classes can deliver strong long-term returns.”

Among the key findings in the report are:

  • Resort and leisure travel is back for the all-important summer season. The jury, however, is still out on when business and convention travel will return—an absolute necessity for the industry to become whole.
  • All eyes are on Labor Day as a critical timeframe for understanding which hotel properties and investors can be called survivors.
  • Sales are expected to spike significantly in the second half of 2021, potentially reaching pre-pandemic levels in 2022 and 2023. Many buyers will focus first on properties that can benefit from leisure travel, particularly those in driving distance of large population pools. 
  • Hotel distress statistics are potentially misleading. More hotels than any other property type are in the distress pipeline, through a transfer to special servicers. Yet looking ahead, the stat does not evoke widespread concern.

A look at distressed assets
Distress is occurring in hotel and retail properties. However, it is not at the level or intensity that originally was expected. The financial stimulus from Congress, along with state and local support, have helped to dramatically curtail the wave of distressed properties coming into the system. This government financial support, along with the surge in vaccine distribution have softened the impact from a tsunami of distressed properties to a watch list, with varying levels of hardship. Still, experts predict there will be more distressed properties coming available for sale, or a continuation of note sales from the banks, later in 2021.

“Investors are trying to predict how consumer spending, business and leisure travel and myriad other factors will impact investor confidence—and, ultimately, capital deployment—in the retail and hotel sectors over the next 12 to 18 months,” adds Steve Shanahan, GM, broker solutions, LightBox. “Many have circled Labor Day on the calendar as a red-letter day for a clearer picture.”

The consensus among real estate professionals, in both the retail and hotel sectors, is that while the pandemic has created challenges on many different levels, the silver lining, if there can be one, is that the markets know this has been a medical/healthcare issue and not a financial market debacle like the Great Financial Crisis in 2008.

The report was based on a survey and interviews with commercial real estate investors, brokers and landlords across the U.S.