3650 REIT sees unprecedented market cycle  

3650 REIT co-founder Toby Cobb believes today’s commercial real estate market conditions are nothing like what has been seen in previous cycles – and that the market needs to learn to adapt to higher interest rates and scarcity of debt and equity capital.   

“As far as investing in commercial real estate debt at large, we are not in an environment that will mimic prior real estate cycles,” Cobb told Real Estate Capital USA. 

Despite a credit profile in which none of the firm’s $16 billion of loans are in default, Cobb recognizes the broader turmoil in the market and the nuances around specific sectors. Retail, which has been battling overbuilding and a rise in online commercial, presents some opportunities. 

“The falling knife is well stuck in the in the floor in retail,” Cobb said, noting the firm is confident in its ability to identify the sponsors with the best ability to perform well. “The losers are actually accelerating the return to profitability of the winners,” he added. 

But the office sector continues to bear close catching. “If the retail apocalypse is almost over, the office Armageddon is just beginning,” Cobb continued. “This is making it extremely difficult for us to know where the dividing line between the winners and the losers is going to be in office.” 

Cobb believes there is a precedent to what is happening in the office sector, citing the potential for loan liquidations.  

“We see some banks liquidating office loans, but nothing like liquidations seen during the global financial crisis and certainly nothing like liquidations during the Resolution Trust Corporation crisis of the late 80s, early 90s,” he said. “We have a long way to go in office before we really know what the outcomes are going to be.” 

However, Cobb does see a silver lining – the potential for well-capitalized lenders and borrowers. “Do I believe there will be opportunities for us, yes. But do I [also] think that things are going to be worse than everybody thinks? Yes,” he said. 

But bigger picture, Cobb is worried about the potential for greater distress. 

“I am fearful that the real estate debacle goes beyond office. It’ll hit all asset classes with a value retrenching in private markets,” he said. “If you look at public markets, commercial real estate should be off by 20-25 percent. The private markets haven’t marked that. I believe that there is more pain to come.”