The Debt Opportunity – May 20, 2024
Connect CRE reported last week that fund managers globally are (temporarily?) stepping back from commercial real estate investments. On a global scale, allocations to CRE haven’t been as low since 2009. That’s due at least partly to the fact that returns on CRE investments haven’t been as low since then, either.
However, this isn’t the whole story. Property acquisitions are only one way to participate in the CRE spectrum.
The alternative route? Debt. As Reuters reported last week, “Some of the world’s largest investors are making deeper inroads into lending to commercial property, as they snap up market share from retreating banks and bet on an end to the sharp drops in real estate prices.”
Investors from the U.S. (PGIM, LaSalle and Nuveen), Canada (Brookfield and QuadReal), the U.K. (M&G, Schroders and Aviva) and France (AXA) all told Reuters they plan to increase their credit exposure to property. “If I look at our strongest bet currently, it’s probably real estate debt,” Isabelle Scemama, who leads AXA’s $198-billion alternative investments platform, told Reuters.
LaSalle Investment Management, which manages $89 billion globally, told Reuters it intends to grow its real estate debt investments by 40% to around $7.6 billion over two years. Targeted sectors include distribution centers, hospitality and student housing.
Meanwhile, Goldman Sachs Alternatives has a similar dollar amount in mind. The firm just completed raising West Street Real Estate Credit Partners IV and related vehicles, a pool of capital representing more than $7 billion of lending capacity including leverage.
Goldman Sachs said the fundraise, the largest to date in this series, occurred amid “a significant opportunity set in real estate credit driven by major dislocations in real estate markets globally, creating attractive opportunities for alternative lending sources that can provide size and certainty of execution to borrowers.” The fund has already started investing into this environment and has committed more than $1.8 billion across eight investments globally to date.
Jim Garman, global head of real estate at Goldman Sachs Alternatives, said, “Consistent with our 30-year history investing through multiple cycles, our real estate platform is designed to be dynamic in the face of changing conditions. While our flagship equity strategies provide clients with access to differentiated opportunities across sectors and regions, with specific focus on assets benefitting from trends in technology, demographics and sustainability, credit has always been a critically important component of our product mix, particularly during periods of capital markets disruption.”
Along with the current market turbulence, a more stringent regulatory regimen for banks is also opening the door wider for funds such as Goldman’s. Then there are the travails that some regional banks with heavy CRE exposure have faced in the past couple of years.
“The challenges faced by the banks have really led to a decrease in direct [loan] originations for commercial real estate,” Nailah Flake, managing partner in Brookfield’s Real Estate Group, told Reuters.
Venturing where others are hesitant to tread isn’t without risks. Reuters noted that the global CRE sector, especially office, is “still in the grip of its biggest slump since the 2007-9 financial crisis.” However, Reuters reported that alternative lenders believe “the worst may have passed” and they can generate attractive returns as property valuations recover.
“Historically through real estate cycles, you would find that generally loans made at the bottom of the cycle… tend to have the lowest delinquency rates and the highest spreads,” Jack Gay, global head of debt at Nuveen, told Reuters. Given that the Mortgage Bankers Association has projected $929 billion of loan maturities in the U.S. alone this year, there will be plenty of opportunity to test out this hypothesis.