1 Newer, niche investments
A rising appetite for non-conventional, niche commercial real estate properties was one of the biggest trends of 2022, a transition that echoed an underlying structural shift in the economy. Landmark transactions include investment bank Goldman Sachs leading a group of lenders to finance private equity firms KKR and Global Infrastructure Partners’ acquisition of CyrusOne, a Dallas-based data center operator, while KKR Real Estate Credit closed six life sciences loans that totaled approximately $2 billion in 2022. Meanwhile, Invesco originated around $1.4 billion in loans in the life sciences sector in Southern California last year, another confirmation of the rise of niche asset classes.
2 Debt as an investment
The level of interest in commercial real estate debt has remained high and is expected to intensify further given returns available in a rising rate environment, according to advisory firm Hodes Weill & Associates. As part of this, both traditional and alternative lenders are diversifying and expanding their lending strategies in the space. A case in point is KKR Real Estate Credit, which last year expanded its real estate credit platform and now has the ability to originate a broad swathe of senior transitional loans, stabilized first mortgages, opportunistic loans and mezzanine debt.
3 C-PACE financing in ESG
C-PACE financing, a tool that allows long-term and transferrable financing for energy efficiency or renewable energy improvements for properties, has gained significant momentum over the past year. Connecticut-based manager Nuveen Green Capital, which specializes in C-PACE financings, saw substantial growth over the previous year as more cities and regions adopted the structure to upgrade the resiliency of buildings. Individually significant transactions are also getting done – in October, Austin-based C-PACE specialist Petros closed a $153 million C-PACE financing as a part of the $829 million Black Desert Resort development project in Ivins, Utah, making it the largest-ever C-PACE financing completed.
4 Mid-market, smaller lenders rise
Last year saw growth in the number of mid-market commercial real estate lenders, with both dedicated businesses and generalist firms with a strong platform in this area demonstrating resiliency. Debt fund manager ACORE Capital – winner of Mid-Market Lender of the Year – originated approximately $6 billion across 69 loans with an average loan size of $85 million across asset classes. Meanwhile, Denver-based manager Arrowmark Partners last year originated more than $2.2 billion of first mortgage loans and structured equity across all markets and asset classes since its inception in 2019, winning the Small-Ticket Lender of the Year award.
5 Office sector’s future
The office sector appears to be facing an existential crisis, with this part of the market facing pressures including smaller tenant footprints, the impact of a potential recession, declining valuations and a lack of capital available to refinance maturing debt. CRED iQ tracked approximately $6.3 billion in loans secured by office properties scheduled to mature in 2023, which accounts for 22 percent of the total 2023 commercial mortgage-backed security conduit maturities. Because most of the large office loans still have debt service coverage ratio levels well above 1x, the first months of 2023 should only see limited defaults. However, investors are sure to be taking an extra cautious strategy to allocate capital to this volatile sector.