The US commercial real estate investment sales and lending markets will likely reboot in the first quarter of 2023, but only because of the number of sponsors who have a near-term need to sell assets or refinance maturing debt, according to Joe Iacono, chief executive officer of New York-based Crescit Capital Strategies.
Iacono, a veteran of several downturns, highlighted a key difference between the market today and during the global financial crisis. Transaction activity completely stopped for a prolonged period during the GFC. But there is capital available today, albeit at pricing that may not always be attractive to borrowers relative to what they have been accustomed to.
“Volume is down, and I don’t think we will see an uptick in activity until at least the end of the first quarter, and that is because people are going to have to start executing,” Iacono said. “The good news is that while today’s downturn is pervasive, the credit markets are continuing to muddle along. This is different than during the GFC, there no one had any capital – everyone was out. Coming into this, we still had a lot of capital that was undeployed, especially for real estate equity – that continues to be available.”
Iacono, like many of his peers, believes managers with access to capital today will be able to take advantage of short-term opportunities. “I think it will be a tale of two investors: those who do not have access to fresh capital and are dealing with stressed existing investments, and those who have capital access. If you can raise capital, you can take advantage of the opportunity right now or over the short-term. Bank balance sheets are full and the debt funds haven’t been able to leverage their portfolios in the CLO market,” he said.
“We also understand that as loans mature into a higher interest rate paradigm, someone is going to have to come up with new equity or debt to fund the carry and the financing gap. We’re going to see some distress but also opportunity and some firms are getting ready for that moment.”
While there have been some green shoots that signal a slowing of inflation, Iacono believes drops in the CPPI in October and November are simply a pair of data points. “If it turns out that was the beginning of the end of inflation, we will look back and say, ‘That was the day.’ Maybe we have hit somewhat of a plateau here,” he said.
“The question is: when will rates come down, and also why are they coming down? Will it be because we are in a deep recession? We have to wait for more data points, like what happens to retail sales in December. I suspect they could be lower because people have less money to spend, but there is still a ton of cash that is sitting in bank accounts.”
Silver lining
Still, Iacono doesn’t believe sponsors will come to market for new loans unless they have to. The firm also has not yet seen any meaningful loan sales, but he believes this could start to happen as banks take a harder look at their loan exposure and CMBS and CLO shops attempt to clean up their portfolios and raise cash.
“We could start to see that fracture next year. We are seeing some mezzanine guys who are looking to sell their positions, but these are just one-off trades here and there. It’s important to think about why someone is selling, too; it could be deploying capital at a better rate of return, or maybe, in the case of distressed assets, the lender is just tired of the deal,” Iacono said.
“Depending on how long the stagnation lasts, at some point you will see some of these companies throw in the towel. If they can’t clear their balance sheet, they could have further credit fractures within their portfolio and the likelihood of seeing their promotes becomes less clear, they could also start thinking about sales toward the end of next year.”
There is a silver lining.
“The flip side is that if you have capital, it is a great time to be a lender. You can dictate better terms, there is less competition, and you can be a lot pickier than before,” Iacono said. “I’m not particularly negative, I’m generally pretty hopeful, but our industry lags and although we have seen a re-marking of asset values, no one has taken any material losses.”
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