Taurus Investment Holdings anticipates 2023 will be an active acquisition year, with chief executive Peter Merrigan outlining opportunity as the commercial real estate market sees a valuation reset start to play out.
The Boston-based manager has been active despite a slowdown in investment sales and financing activity in the first quarter of the year, closing two deals that included the acquisition of a 600,000-square-foot industrial portfolio in Atlanta and a historic theater in New York. The latter property, converted into a theater in 1932, includes studio space, the theater and eight apartment units. It is leased to New York-based global entertainment company A24 on a long-term lease.
The firm’s deal for the Cherry Lane Theater at 38 Commerce Street in New York’s West Village submarket was done on an off-market basis. “The theater is a mission critical facility for A24,” Merrigan said. “We are working on a few other fairly large transactions in the US and UK, which means we are still finding opportunities. But it’s hard work.”
The primary reason why deals are hard to get done, Merrigan added, is the dislocation in the debt markets. This dislocation has meant the firm has worked creatively with lenders to get deals done, obtaining financing from an insurance company for its Atlanta acquisition and working with a regional bank on the Cherry Lane Theater deal. It is also looking to assume in-place debt for a potential US acquisition and is in talks with debt funds in the UK for another deal.
“The financing markets are pretty choppy, and pricing is all over the place,” Merrigan said. “We used to get multiple bids on a financing opportunity, and now we’re lucky if we get one or two.”
Much of what Taurus has been working on is in the industrial sector, with Merrigan noting the firm has been invited to be part of smaller, invitation-only bidding groups on assets that are going up for sale.
“There is a small market being made around certain deals, and because we are not the only bidder, there is some understanding of where things are being priced,” Merrigan said. “But the deals always depend on the debt. If you can assume debt, the deal will price one way but if you must secure new debt, it will price differently.”
Like many of his peers, Merrigan believes the pace and severity of rate hikes will be more moderated going forward.
“We think we are past peak inflation, and we think there could be one more hike,” Merrigan said. “The problem is that there are loan maturities that are happening this year, particularly in the CMBS market where borrowers don’t have a chance to refinance or extend.”
Ultimately, this means there will be loan maturities that will have to be dealt with. “Depending on what the product type is, there could be no bid for refinancing opportunities for some sectors. That will create a market reset for that kind of product over the next 12 months,” Merrigan said. “This whole deleveraging and default situation will have to develop and there will be a very choppy 12 months as it plays out.”
What will put the market on a more stable course is a pause in rate increases by the Federal Reserve, Merrigan said.
“This will allow borrowers to buy more time until refinancing becomes more attractive and the CMBS market reopens. But as for now, more people will be handing the keys back,” Merrigan said. “If you have a loan maturity, there is often no take out. And if you have a big lease coming up, there might not be anyone there to write a check for tenant improvements. We’re starting to hear whispers that banks are not funding good news money or capex.”
Green lending, a nascent part of the US lending market, continues to be present but does not seem to be a priority for lenders or borrowers at this point, Merrigan said.
“We aren’t seeing a big mandate on the green lending side, but we are seeing a huge mandate on the equity side. The lending market is so upside down generally, it is getting lost in the shuffle of all of the other problems. It is just hard to finance anything right now,” Merrigan said.
As Taurus waits for the lending markets to unlock, Merrigan believes the firm’s approach has been to prepare for a real estate correction period, covering the existing business, making sure the firm is both in a defensible position and prepared for potential opportunities that will come from this period of distress.
“We are hoping this will be a big volume year for us as the reset plays out,” he said. “There is plenty of equity out there, but we need to watch the debt markets play out because that is what is going to drive the valuations. And as we have seen, managers are still raising capital so ultimately, there will be plenty of capital to take advantage of the situation.”