A new venture between Korman Communities’ AKA Hotel Residences affiliate and Electra America is raising a $500 million investment fund to buy distressed hotels in gateway markets across the country and joins a growing number of local firms positioning themselves to take advantage of troubled real estate assets that are expected to come available beginning this year.
Corten Real Estate Partners formed a partnership with GCM Grosvenor on a $50 million fund that will focus on buying distressed real estate throughout the mid-Atlantic. The fund can be leveraged to purchase upwards of $150 million and will look for hotel, multifamily and office properties that have suffered as a result of the pandemic.
Stockton Real Estate Advisors brought in Alan Jovinelly, who has decades of experience undertaking hundreds of loan workouts, bankruptcies, receiverships and other matters involving distressed real estate. The firm plans to initially approach banks and help them work through distressed portfolios, which is expected to total $126 billion over the next two years, Jovinelly said.
“There’s tremendous stress right now,” he said. “So much damage has been done to so many tenants that there’s a lot of walking dead out there. The sooner banks address these problems, the better their values are protected.”
The current downturn affecting real estate veers from the one prompted by the 2008 financial crisis, said Matt Malone, managing director of real estate at FS Investments. “The two are totally different,” he said.
The 2008 recession was led by over leveraging in commercial and residential real estate while this time around, real estate is being affected by how people are using real estate. In early 2020, prior to Covid-19, commercial real estate was generally performing well though there were cracks in retail that were turning into fissures.
“Covid accelerated those trends,” he said. “Retail is lagging where a sector like industrial continues to do well because of e- commerce trends. People are reading the headwinds and when you dig a little deeper, it hit some sectors harder than others.”
While grocery-anchored retail has thrived, malls are struggling. The hospitality industry has taken a hit and, while predictions of the death of the office have swirled during the pandemic, there’s confidence in its future. Apartments have also fared well.
“What we are going to see in 2021 is there is a lot of money on the sidelines looking to come into real estate,” Malone said. “There’s certainly money looking to be opportunistic but I don’t think those opportunities have presented themselves yet.”
There’s a record $324 billion waiting to snap up real estate this year, according to Preqin’s latest research.
The new venture formed by South Florida’s Electra America and Plymouth Meeting-based Korman’s AKA is called Electra America Hospitality Group. It is in the process of raising the $500 million in preparation of buying upwards of $1 billion of hospitality properties that will be forced to be sold or foreclosed upon. It is concentrating on independent, unbranded properties and will target gateway markets such as Washington D.C., Miami, Los Angeles as well as properties in London, Paris, China, and the Mideast.
“We’re focused on two things,” said Russ Urban, a veteran hospitality executive, who serves as CEO of the new venture. “Markets where we have seen a dramatic downturn in business so there are some distressed owners and markets where there will be a rapid, deep demand.”
The fund will also seek out three-star properties that might not necessarily be distressed but could be elevated with a capital infusion. “We will look at three stars where the bones are good and it can be brought to four stars,” Urban said. “We want to be a portfolio of four-star hotels.”
The idea is also to leverage the AKA brand on some of the purchases and cater to a the type of traveler that is expected post pandemic.
“I think travelers are seeking self-sufficient sanctuaries and spending longer lengths of time in their stays,” said Larry Korman, president of AKA Hotel Residences and co-CEO of Korman Communities. “I think people will travel less and stay longer. We are looking at a mix of properties that what will resonate and appeal with today’s traveler.”
Korman’s AKA brand has done well during the pandemic for those reasons and others including parents leasing out units for college- aged students to live in while others have taken up temporary residency in the apartments.
The fund will look at $20 million to $100 million deals with most in the $30 million to $40 million range per property. In the end, it is expected to end up with about 15 properties.