Family offices dig into short-term lending

More family office investors are looking at short-term lending opportunities as the line between debt and equity becomes more blurred.

A growing number of US and international family offices are looking to make short-term commercial real estate debt investments, seeking opportunities to expand their portfolios at a time when interest rates are expected to be higher for longer.

Pennington Partners, a Bethesda, Maryland multifamily office, believes the current dislocation and illiquidity stemming from bank pullback in the sector presents an opportunity to invest across the capital stack, Roger Staiger, senior adviser, told Real Estate Capital USA.

“We are considering short-term opportunities which can extend from equity to mezzanine to senior debt, depending on what the borrower needs and what the family office we are working with on the opportunity wants,” Staiger said. “We are also finding that the line between debt and equity is becoming increasingly blurred.”

“I view the private family offices as a more efficient solution to bringing supply and demand back into balance”

Roger Staiger
Pennington Partners

Altre, a Sao Paolo-based investment management company, believes the current fluidity within the capital stack presents a unique opportunity as it seeks to expand its commercial real estate platform in the US, said Haig Apovian, chief investment officer.

The firm, which opened an office in New York earlier this year, is seeking transactions in the industrial, multifamily and logistics centers. As part of this expansion, the firm will consider exposure to the credit markets, Apovian said.

“Real estate plays a significant role if you look at the largest institutional investors in the world. We were always real estate holders, but not investors, mostly as support for industrial operations,” Apovian added. “We see that as an opportunity in terms of risk-return and we see in structured deals rather than holding only the equity, if we find the right opportunity.”

Kingbird Investment Management – the real estate investment subsidiary of Grupo Ferré Rangel, a Puerto Rico-based century-old family office and diversified strategic holding company – anticipates these opportunities will continue to crop up over the next 12 to 18 months, said Mark Pasierb, the investor’s president. “We see an opportunity to help borrowers get to a point where they can refinance within the next 24 months and achieve mid-teens return for a short-term mezzanine or preferred equity,” Pasierb said.

Deploying capital

Entering or expanding into the US commercial real estate equity and debt markets is part of larger growth strategies for the family offices which spoke with REC USA.

For Altre, this activity will be done via joint ventures, Apovian said.

“The goal is to underwrite and originate business, and we will be investing through best-in-class local partners who can help us to navigate the market and originate opportunities,” Apovian added. “We are looking to invest a couple of hundred million of equity in the US markets, seeking deals of $40 million to $70 million in which we have co-investors along with us beside the GP capital.”

Pennington Partners, which sources and underwrites investments through internal capital and on behalf of its family offices clients, sees the ability to be flexible in its investments as critical in today’s choppy markets, Staiger said.

“Not many borrowers fit with a traditional bank right now because traditional banks don’t want real estate,” Staiger added. “We have capital and while we can underwrite quickly, we are not going to close quickly at the expense of missing something.”

Pennington Partners’ activity will also be driven by the specific risk-return profile of its clients.

“We won’t have a focus on a single sector or market because there are some families looking for low-risk, CBD properties with steady income. We also have other individuals who have sold companies and are looking to invest in real estate. Their risk profile is different,” Staiger noted. “And then depending on the family, we could be deploying equity, mezzanine, preferred equity or senior debt.”

The pricing on short-term financing is particularly attractive right now, Staiger said.

“It is possible to get returns of 11 percent to 13 percent in today’s market with a relatively low [loan to value]. And if it is necessary to take on the real estate, although we don’t want to do that, we can do so,” he added. “While we are not looking to foreclose, we underwrite as if we would have to go through that.”

Outlook

Kingbird’s Pasierb sees a specific opportunity in the apartment and industrial sectors. The firm is sourcing investments via an existing network of brokers and other market contacts.

“We are tapping into our networks [in the US and globally]. We say, ‘Who do we know who is having issues with properties and how can we step in to help?’” Pasierb said.

Kingbird also sees this expansion of its real estate strategy as part of a larger plan to increase its assets under management. Pasierb noted the firm is seeking to raise additional capital.

There will be two key things which matter over the next two years: relationships and agility, Pasierb added.

“We don’t have to invest in every deal that comes through our door,” Pasierb said. “We are seeing short-term preferred and mezzanine opportunities and some development opportunities as well.”

Pennington Partners’ Staiger believes that while the commercial real estate transaction markets will be stagnant through 2023, this will change in 2024.

“I think the trees will shake with fruit next year,” Staiger said. “I think the price adjustments people feel will occur, for lenders and borrowers. The best thing that could happen to banks is for them to recognize the new value of their real estate portfolios and recognize that they are not owners.”

This realization, Staiger added, means banks could sell to non-bank lenders with the ability to work out or recapitalize loans.

“We will then be able to step into the lenders’ shoes to work out the deal with the borrower,” Staiger noted. “I view the private family offices as a more efficient solution to bringing supply and demand back into balance.”