AEW: 2023 is an opportune time to be a debt investor 

Boston-based AEW Capital Management is seeing abundant opportunity to invest in the commercial real estate debt markets through 2023 as gaps in the capital stack are allowing experienced lenders to find value.

Higher interest rates and wider loan spreads are offering investors the opportunity to earn target returns with less risk, the firm’s debt team told Real Estate Capital USA.

“This debt capital scarcity is enabling lenders to achieve better structuring terms as negotiating leverage has shifted from borrower to lender,” the firm said. “These factors have created what AEW believes may be a period when lenders receive high yields per unit of leverage that have been largely unachievable over the past decade.”

The firm is aiming to take advantage of the current environment and grow its debt platform – focusing on affordable multifamily as well as some niche, subsectors within industrial and healthcare.

“Although pockets of near-term supply are a concern for some markets, we continue to see opportunities to lend on market-rate and affordable multifamily properties, particularly when property values and debt yields are sized to the current market to mitigate refinance risk,” the firm said.

While the logistics sector has enjoyed outsized and broad-based appreciation, AEW believes lenders are better off targeting subcategories, such as cold storage, where there are fewer market participants providing capital. 

“Healthcare-related sectors, such as senior housing, offer value to a loan portfolio today as debt capital is scarce despite a supportive supply-demand picture, improving performance and significantly corrected property values,” the firm said. “Senior housing is as much an operating business as it is real estate. Therefore, lenders need specialized knowledge, deep relationships with operating partners and a proven ability to select and manage the right assets.”

As part of its growth plans, the firm recently hired Dean Dulchinos as head of debt portfolio management.

Dulchinos arrived from Amherst Holdings where he served as head of SFR portfolio management. Before that, he was head of real estate debt portfolio management and capital markets at Barings, overseeing commingled funds and separate account, responsible for managing $28 billion in stabilized, transition and construction investment strategies.

Based in Boston, Dulchinos joins Justin Pinckney, AEW’s head of private debt, North America, leading AEW’s debt investment platform.

Dulchinos and the team believe the current market is poised to provide abundant opportunity beyond 2023 as lenders and real estate owners wrestle with the consequences of demographic shifts to how real estate is used, rising geopolitical risk and what the firm sees as an inflation-centered Federal Reserve whose policies are promoting economic uncertainty and rising unemployment.

“Leverage levels for acquisition and construction financing have declined 5-10 percentage points from a year ago, which is playing a pivotal role in creating the current opportunity set,” the firm said. “Coupled with resetting property values, lenders are enjoying better positioning power in the capital stack than they have since the recovery from the Great Financial Crisis.”