DWS’s Henderson sees structural shift toward private credit lenders

A combination of a shortage of supply, strong sector fundamentals and lower leverage can create tailwinds for private lenders. 

A structural shift in commercial real estate lending is expected to create more opportunities for private lenders as bank lenders further pulled back from the market due to strengthening regulations, according to Todd Henderson, global co-head of real estate at Frankfurt-based manager DWS Group. 

As the portion of bank balance sheets committed to real estate lending shrinks, private lenders will have more space in which to originate new loans. New lending opportunities are likely to benefit from multiple tailwinds as the macroeconomic environment and the interest rates picture evolve, Henderson said. 

The firm is also starting to see more situations in which larger banks are looking at more ways to creatively utilize their capital, with some seeking relief trades with alternative lenders, Henderson added. 

“I don’t think [the current opportunity is] a window that’s closing. I think private credit has the opportunity to take advantage of this structural shift in the provision of credit to real estate,” Henderson noted. 

Bullish outlook 

DWS does not have significant problems in its portfolio, which has allowed the firm to be -front-footed in emerging investment opportunities. 

“We’ve been fortunate, [but] I don’t think it’s luck. It’s driven by a very disciplined, integrated investment approach, and execution around it over the last decade,” Henderson added. 

The asset manager has been working on its residential debt strategies and client relationships as opposed to trying to hold on to the franchise in the current market. Despite the general downturn in commercial real estate, Henderson has a bet on sectors including residential, industrial, and grocery-anchored, necessity-based retail owing to a recovery of demands in these spaces.  

“We have seen deterioration of demand in these sectors, [but] I think that is the covid hangover effect where demand was pulled forward. We have seen demand or the factors that stimulate demand head back to pre-pandemic trendlines,” he said. 

Henderson added that while industrial took longer to see the resurgence of demand, the vacancy rate in all three sectors has been significantly below the historical levels in the past three quarters.  

Potential tailwinds 

One reason why Henderson still holds a positive outlook for growth is the interest rate environment.  

Though the 10-year Treasury had run up to close to 5 percent by the middle of the fourth quarter of 2023, Henderson believes that long-term rates have started to recouple with economic data. He also cited the consumer price index in recent weeks, which indicates the potential for rate decreases in the coming year. 

“Once we get through 2024, I don’t think there’ll necessarily be a lot of real estate yield compression, [but] we could see cap rate compression in 2025 from where the market is pricing today,” Henderson said.   

Cap rate compression is considered a positive situation for property owners as the pricing of the assets rises. In addition, Henderson noted the potential yield compression can also be a tailwind for commercial real estate if the 10-year Treasury scales back in 2025 from where the market expected it to be. 

But still, the core of his bullishness is the imbalanced supply-demand scenario, which could contribute to an acceleration of rental rate growth across sectors. 

“The key to my bullishness is the supply picture in both the residential and the industrial sectors. Construction starts are down 65 percent from where they were a year ago. That translates into a supply pipeline in 2025 that, from our perspective, is going to be below the rate of obsolescence,” he added. 

Regarding the office market, Henderson said DWS Group is underweighting the sector and staying lowly leveraged in existing deals. 

“I think the challenges in the office market are real – it’s a story. But I think the story that the office market is going to crater the economy or create a systemic banking crisis is a story that’s oversold and exaggerated, and a doom loop that needs to be broken,” Henderson said, noting that office only takes up a small portion of the market and there are limited bank loans exposed to office, so the sector’s challenges won’t roll over the entire market. 

“If you can lend at lower loan-to-values, higher debt yields, and significantly higher total returns on more conservative underwriting in the face of strong fundamentals, that’s a recipe for really attractive returns in the debt space,” he said.