The Resilient Distressed Opportunity: Part 1 - Virtus
June 5, 2020

The Resilient Distressed Opportunity: Part 1

Cycle-resilient property segments performed better during the Global Financial Crisis, and in our current COVID reality, they are doing so again.

Cycle-resilient property segments performed better during the Global Financial Crisis, and in our current COVID reality, they are doing so again.

Yet, despite their outperformance, due to the unique nature of these asset types, there is always distress on the fringes. In a post-COVID world, that distress will only become more widespread. In this four part series, we’ll examine this unprecedented opportunity in “resilient distressed” segments.

Up first, we’ll dive into the compelling buying opportunity post-quarantine that we’ve
not seen in nearly ten years, what we are calling “Resilient Distressed.”

What is “Resilient Distressed”?

Resilient distressed refers to distressed opportunities in cycle-resilient segments, like healthcare, education, workforce housing and self-storage segments, whose demand from tenants remains robust throughout economic cycles, due to the inuring needs for those property segments in good times and bad.  Contrast this to the basic food group segments (office, retail, hospitality, industrial and traditional multifamily), whose tenant demand is highly correlated to economic cycles.  Historically, buying distressed in these segments has meant demand was disrupted by a broad economic downturn because tenant demand is generally tied to the broader business cycle.  Owners would suddenly find fewer prospective tenants crossing their threshold, revenue and NOI dropped, and they could not hold onto their assets, especially if they were overleveraged or had an aggressive capital structure.  Valuations are reduced with more forced sellers in the market, and buyers can take advantage of this temporary dislocation.  That is why, just in the last month, many distressed funds have been launched by some of the biggest PERE fund managers.  When the economy recovers, demand for traditional CRE generally recovers (unless your property segment is experiencing a secular disruption, such as in retail, office, and hospitality in recent years), and the distressed opportunity goes away.  It has been nearly ten years since the last wave of distressed CRE funds were launched.

We are always buying distress at Virtus.  Even during the peak of the CRE markets over the last five years, we have consistently found distressed opportunities.  Despite tenant demand for our property types being very stable during both contracting and expanding markets, the idiosyncratic risks, operational intensity, and fragmented nature of our targeted asset classes create numerous one-off distressed opportunities even during healthy markets.  During challenged markets, like we experienced 2008 – 2011, we became very active in acquiring distressed by purchasing REOs, executing deeds in lieu of foreclosures, short sales, or just simply acquiring properties at debt bases because the owner needed relief from their recourse and was willing to sacrifice their equity.  Even though we weren’t nearly as experienced in buying distress coming out of the GFC as we are now, the opportunity set was greatly expanded along with the potential for enhanced returns, which is what we expect from the 2020 – 2022 period.

Up Next: The Origins of Distress in Cycle-Resilient Segments

Quick Navigation

    You May Also Like

    • February 6, 2024

      Acquisitions & Asset Management Internship

      Read More
    • January 8, 2024

      Virtus Presents: The 2024 U.S. Real Estate Outlook

      It has been many years since there has been a more dramatic change in commercial real estate ("CRE") markets.  The unprecedented interest rate increases from the Great Tightening have had …
      Read More
    • January 31, 2023

      2023 U.S. Real Estate Outlook

      Virtus Presents: The 2023 U.S. Real Estate Outlook It’s been many years since there has been a more dramatic change in commercial real estate markets.  The unprecedented…
      Read More
    • December 12, 2022

      New Gateways for a New World

      Recent years have seen immense investment interest in rapidly growing markets outside the general Tier-I “Gateway” commercial real estate markets.  However, with a climate of renewed uncertainty and In this whitepaper, Virtus explores the case for a new class of markets that have benefited from patterns in demographic growth, regulatory policy, and technological advancement over a much longer…
      Read More
    • November 16, 2022

      Virtus Real Estate Capital and Almanac Realty Investors Announce Strategic Minority Investment

      Transaction marks the second minority GP stakes investment from a fund managed by Almanac and will support Virtus’ continued growth…
      Read More
    • May 31, 2022

      The Effects of Climate Change on Real Estate Investments

      The impact of climate change on commercial real estate markets has long been underappreciated due to the pervasiveness and time distance of expected effects. However, that sentiment is beginning to…
      Read More
    • May 16, 2022

      The Rising Popularity of Alternative Asset Classes in Core Portfolios (Alts on the Rise)

      Despite challenges in accounting for returns and benchmarking performance, alternative asset classes offer defensive or yield-oriented core strategies associated with large institutions along with lower macroeconomic and real estate…
      Read More
    • January 13, 2022

      2022 U.S. Real Estate Outlook

      2022—The best of times and the worst of times Like many of you, we welcome the arrival of 2022.  But, despite the euphoric backdrop of most asset classes, pervasive…
      Read More
    • November 16, 2021

      The Current State of Disruptive Construction Technologies

      Despite skyrocketing costs in traditional construction, advances in construction technology has been relatively muted for several decades compared to other crucial sectors.  However, the current moment shows evidence for both In this whitepaper, we help the reader make sense of this evolving landscape, tracing the current state of “new best practice,” and the most likely trajectory future construction will take A few key takeaways - Conventional “modular” construction techniques will continue growing and improving, but their fundamental limits remain. - The current moment is one of rapidly proliferating tech solutions across all - Building technology will provide a competitive edge for individual firms or strategies, but will not solve housing affordability alone. Read the paper here.  About Virtus Virtus Real Estate Capital, founded…
      Read More
    • June 21, 2021

      Virtus Real Estate Capital Closes $578 million for Virtus Real Estate Capital III, LP

      Virtus Real Estate Capital ("Virtus"), an Austin-based private equity real estate fund manager focused exclusively on cycle-resilient property types, announced the final close of Virtus Real Estate Capital…
      Read More