Barings is looking at a re-ordered group of lenders in the new year, with bank lenders dialing back their origination volume and other debt providers ramping up their lending.
The Charlotte-based real estate investment manager is anticipating a 2023 with more refinancing and construction loan opportunities as acquisition momentum drops from quarters past in response to a rising interest rate environment.
Nasir Alamgir, head of Barings’ real estate debt portfolio management, told Real Estate Capital USA the firm ended 2021 cautious, looked at 2022 as being a frothy year and is now seeing industry-wide transaction activity slow its pace compared with previous quarters. “While rents moved in directions that would support some of those numbers, it still felt like it was not a sustainable pattern in terms of growth,” he said.
Such caution resulted in a more defensive year for Barings, which managed $27.1 billion in commercial real estate debt assets as of September.
Alamgir expects Barings’ 2023 lending mix to be less about acquisitions – though they will still account for 10-15 percent of the remit compared with 40-60 percent in years past – and more about refinancing and construction lending.
With the overall pipeline down and the firm anticipating a 20-30 percent drop in deal activity, Alamgir said refinancing will likely comprise 60-70 percent of Barings’ new debt opportunities in the near term, with the balance focused on construction financing.
“The amount of construction financing opportunities that we’ve seen has significantly increased. I do not think it is because the amount of construction activity has necessarily picked up,” Alamgir said. “It is because borrowers that typically might have gone to a traditional regional bank, super-regional bank or an international bank do not have access to that capital anymore.”
Inside the loan mix, underwriting parameters and preferences are adapting, too. Alamgir said there are some competing interests between lenders and borrowers right now because sponsors want floating-rate in hopes the US Federal Reserve will reverse its interest rate hike midway through next year.
“As a lender when you’re putting money to work, you do not want to go through all of that work with the idea that you are just going to get this money back in six months or 12 months,” Alamgir said. “The call protection that lenders are seeking and asking for is increasing versus prior to whatever we want to call this stretch of economic challenge.”
‘More creativity in the market’
Alamgir said he expects more creativity around refinancing as maturities approach in the new year, adding it is tough to say how the impending wall of maturities will affect Barings’ origination volume one way or another.
“If there is more creativity in the market next year, it will come with a cost – whether it be additional structure, spread, or tranching of the capital stack,” Alamgir said.
While an increased usage of mezzanine and preferred equity components has not materialized yet, Alamgir said upcoming lending opportunities beyond refinancing existing debt will rely on how effective the Federal Reserve’s measures have been. He also expects the probability of a recession is elevated now and may last longer than forecasted, with rates remaining high in tandem.
Alamgir said a central question is what the relative value of such preferred equity positions will be, given the amount of money raised in the distressed space in 2020 that was never fully tapped due to government rescue packages and fiscal support.
“If you look at the activity in CMBS or CRE CLOs, it is a far cry from what it was last year,” Alamgir said. “So, with those maturities coming due over the next two years, if we continue to have economic challenges, and we continue to have higher rates for longer, that is where you could see that demand for preferred equity and other solutions.”
Alamgir said lenders with dry powder will be able to pick their spots in the new year and find good opportunities to put their money to work at attractive bases and great risk-adjusted returns – but noted it is hard to determine just how big the opportunity set truly is. He said the question is not whether 2023 will be a down year with select opportunities, but whether the loss of momentum continues onward into 2024.
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