Canyon Partners is observing greater investor interest in commercial real estate debt as an investment class at a time when the investment manager is also seeing an increase in the number of performing and non-performing loan investment opportunities.
The Los Angeles private equity firm is seeing a confluence of factors drawing more investors into real estate debt. Compressed yields within the broader fixed-income market have helped to fuel a rise in real estate debt allocations, Robin Potts, the firm’s co-head of real estate, tells Real Estate Capital USA.
“Real estate debt provides a consistent yield opportunity that is attractive from an asset-backed perspective and has low volatility,” says Potts. “It has continued to gain traction from an allocation perspective because on a relative basis, within the broader fixed income markets, private credit within real estate offers really attractive relative yield and risk-adjusted return.”
As the firm seeks potential investments, Canyon is tracking both performing and non-performing opportunities.
“With the recent expiration of the covid forbearance relief for banks, which provided a grace period for marking non-performing positions, there may be interesting non-performing loan opportunities that come up in 2022, as banks ultimately may need to mark to market some of these positions and that may catalyse dispositions in a different way than what has occurred to date.”
Canyon has tracked an ongoing education process within the institutional investor community over the last five to seven years, with the technicals of the fixed income markets forcing investors to alternatives. Potts also firmly believes that investors are increasingly looking at real estate on a more granular level.
“The last couple of years have been eye-opening for a lot of investors, [encouraging them] to be more sector-specific and granular and have confidence in certain asset classes that are going to be better able to weather any type of storm because of resiliency – multifamily being at the top of the list, and of course the industrial space,” says Potts.
“Global and macro themes will always be important to take into account for any investment strategy, but [events of recent years] have highlighted certain sectors within real estate that are very resilient and provide consistent, durable cashflows, even against a volatile macro backdrop.”
In terms of geography, secondary cities remain a focus for the firm, as locations such as Atlanta, Austin, Dallas and Phoenix continue to expand in terms of depth of infrastructure and amenities.
“We will continue to actively invest in these locations,” says Potts – although, not to the exclusion of other markets, she adds. “There will be situations that we find interesting in the primary markets, but the fundamentals of where the demand is right now [means that] secondary cities will definitely continue to be a theme [for us].”