The US commercial real estate debt markets have evolved substantially since the global financial crisis, with more stringent regulations curtailing bank lending in the sector and giving rise to alternative lenders. There is expected to be a similar period of innovation in the wake of the covid-19 pandemic, with the market bracing for further regulation curtailing bank lending at a time when rates are higher, and the market is facing an estimated $1.9 trillion maturity wall, per MSCI data.
But this innovation must be about more than deploying capital effectively and creatively, say panelists in Real Estate Capital USA’s first founder roundtable.
The panel includes Patti Unti, a managing director at Waterfall Asset Management; Tammy Jones, co-founder and chief executive of New York-based Basis Investment Group; Alicia Glen, founder of New York-based MSquared; Abbe Franchot Borok, managing director and head of US debt at Miami-based BGO; and Vicky Schiff, chief executive of Los Angeles-based Avrio Management.
Lenders and investors need to adapt to a world in which rates will be higher for longer, where the need for affordable housing has become paramount and where climate change has an impact on commercial real estate. The commercial real estate market also needs to adapt to a world in which more women and people of color are in leadership and have a solid pipeline of similarly diverse junior professionals, panelists say.
Founding a company often happens at what might seem like an inopportune time in terms of market stressors. But it is also often at the right time to solve a problem or expand a much-needed strategy into the market.
The aftermath of the global financial crisis was a catalyst for Jones’ decision to launch Basis Investment Group, while Unti describes a more recent situation in which the current market dislocation allowed her to leverage Waterfall’s debt platform to make targeted equity investments.
Schiff rolled out Avrio Management to directly address the need for financing in a capital-constrained market, including for the lending to borrowers focused on green properties, and Glen started her own company to develop and promote the development of mixed-income, urban housing, often via public-private partnerships. Borok, meanwhile, has spent the last two years overseeing the growth of BGO’s US debt platform.
Unti, who has spent most of her career in the commercial mortgage-backed securities and commercial real estate debt space, explains how this expertise allowed her to look at the market in a different way.
“We examined the stressors we were seeing in the market and compared that to where bonds were being sold and the levels at which they were being sold. We realized there was an opportunity to acquire the controlling class bonds in certain deals,” Unti says. “I built a team, a strategy and a track record and was able to stand that up within the firm.”
Unti was able to do this in part due to her long experience in buying CMBS, which contributed to a greater understanding of the idiosyncrasies of that market.
“I understood that we could be doing more than just buying out a loan and flipping [the property]. I proposed we should be buying these defaulted assets and working with the operators to re-envision and reposition properties to bridge to better times,” Unti adds.
This type of flexible approach was echoed by the other panelists, with Jones citing her ability to bring together a background in debt and equity to launch Basis – and strategically scale the firm in the more than 10 years since its launch.
Basis has a commercial real estate credit platform through which it invests and lends as well as an equity platform the firm acquired three years ago. Another significant milestone was when Basis entered the agency lending business, with Jones noting the firm is now the only Black and female seller/servicer for Fannie Mae and Freddie Mac.
“The key for us has been diversification and making sure we are in the right spaces. The agency business is the provider of liquidity for all multifamily properties in the US and securing those licenses was important because that is a resilient business,” Jones says.
“Now, we are trying to find creative ways to build out the capital stack ahead of this wall of maturities we are expecting to see.”
For Borok, moving to BGO two years ago to head up the expansion of the firm’s US commercial real estate debt platform, was partly driven by a desire to launch a national debt platform on a larger scale than she’d done in the past.
“I’ve been investing up and down the debt capital stack throughout my career. After being at a smaller debt platform, my view was that you had to be a large player in the real estate debt capital markets to be relevant. We have also been successful at BGO by building off the breadth and expertise of our equity platform to grow our debt business. I was at a point in my career where I was ready to go big or go home,” Borok says.
“We raised our first capital in 2021 and are now feeling good about timing. We thought [the pandemic] was going to be an inflection point to create an attractive debt investment market and are now looking toward a pretty interesting environment for debt.”
With Avrio, Schiff was looking to solve a different problem: how to build a virtuous cycle in commercial real estate lending by launching a platform to overlay ESG principles like sustainability, affordability and job creation. Schiff formed Avrio in 2023 after her previous firm, Mosaic Real Estate Credit, was sold to a mortgage REIT in 2022. A member of the board of several Toronto-based REITs in the Dream family of companies, Schiff began to speak with Dream about launching a debt platform.
“Dream is one of the largest ESG and net zero focused developers in Canada and invests globally as an owner/operator. They have a deeply experienced sustainability team that helps us think through a practical measurement system when applied to debt,” Schiff says. “I thought there was an opportunity to move into the future in financing new projects, as well as providing capital to existing assets, through a blend of investing up and down the debt capital stack.”
Leaning into residential
The theme of lending investing in the multifamily – and broader residential sectors – is a key one for the panel, and one that Glen is working to achieve via MSquared.
Glen, who has spent her career in both the public and private sectors, formed MSquared three years ago after a long tenure at Goldman Sachs and a five-year post as deputy mayor for housing and economic development in New York during the de Blasio administration. At Goldman, Glen founded the firm’s Urban Investment Group, which was the first platform on Wall Street to invest and finance minority companies and underserved neighborhoods.
MSquared invests in mixed-income products around the country and has a New York City fund that focuses on affordable housing. Finally, the firm has a development business with more than 3,000 units in the pipeline.
“At Goldman, we helped to create the notion that institutional capital could do interesting or impactful types of strategies,” Glen says. “I am very focused on public-private partnerships and, as a women-owned and woman-managed platform, my goal is to build more diverse cities and to have more women and people of color at the table to change the status quo.”
Launching a platform or a business, particularly at a time of dislocation, was not for the faint of heart, the panelists concur. It becomes more complicated to do so as a woman or person of color, they say.
“I think you get to these points in time when you can take the easy path or the more difficult one and, I think especially for women, we have to be more comfortable with risk taking than our male counterparts in order to advance our career,” Unti says. “But I took that risk. I got a small bucket of capital and did a few deals while creating a track record and a strategy.
“We need to encourage women to shine and do that and stand out. It is a little creativity, a little thinking outside of the box and taking some risks to take it to the next level.”
As the US banks brace for the introduction of more stringent bank capital requirements from the US Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, debt funds and other alternative lenders believe these changes will pave the way for the next expansion of this part of the market.
Borok notes that since the global financial crisis, sponsors have become much more comfortable with alternative lenders.
“Coming out of the GFC, alternative providers of debt capital were very opportunistic and were often thought of as buying credit at a discount with a loan-to-own strategy,” Borok says. “Even a few years after, alternative lenders still had to convince a borrower who could not go to a bank, that they did not have a loan-to-own strategy. But there has been a real evolution of the private real estate debt providers. This de-banking concept where the banks will continue to pull back has been going on since the GFC and will continue.”
Blueprint for new deals
Basis Investment Group’s financing for a mixed-use project in Philadelphia involved minority-led representation
There are both cyclical and secular opportunities to lend and invest capital across the US, Basis Investment Group’s Tammy Jones notes. But there is also the opportunity to create a blueprint for a new kind of real estate deal – and a new kind of real estate company.
“Basis Investment Group is 75 percent comprised of women and people of color and we have invested and loaned $6.5 billion since our inception in 2009,” Jones says. “I believe diverse teams produce better outcomes. That has always been my ethos.”
This ethos was reflected in a deal Basis completed in Philadelphia, providing $100 million of equity and preferred equity for a mixed-use residential and multifamily project that is part of the ongoing redevelopment of the Philadelphia Navy Yard.
The financing is unique in that each part includes women- and minority-led representation. CBRE Capital Advisors arranged the financing on behalf of sponsors Ensemble Investments, Mosaic Development Partners and Korman Communities.
“In addition, the GP group included Mosaic, which like Basis is African American- and female-owned. Not only do we have this opportunity to provide opportunity for women and people of color, but we can be creative in how we deploy capital,” Jones says.
Part of the evolution of alternative lenders is the ability to approach debt investing from several different angles. For BGO, this means being able to lend via the balance sheet of their life insurance company parent, SunLife, and through the value-added buckets of capital. “We feel like we are in the early stages of the golden age for private debt and, specifically, real estate debt, given the continued de-banking in the system,” Borok adds.
Jones believes the maturity wall will be a strong opportunity for debt funds and other alternative lenders to step in and anticipates an increase in the use of creative structures like participating preferred equity. She notes, however, that lending and investing remain frozen in part because there has not yet been capitulation between buyers and sellers on pricing.
For Avrio, the firm is looking at opportunities up and down the capital stack but sees the same stasis Jones and the other panelists described. “Borrowers struggle with today’s debt pricing and trades have not started to clear the market quite yet due to mark to market losses,” says Schiff.
Avrio favors a combination of financing conversions to support more housing, construction financing and recapitalization lending for existing assets.
“Regarding major renovation or construction, new is better, no matter how you slice it. When a borrower is stressed, there is a degradation of the asset and while an opportunity may sound good on paper, we are able to understand what works and what does not,” Schiff says. “Re-entering the market in 2023 gives us an advantage because we don’t have any legacy issues and we’re not spending a significant portion of our time in restructuring or workout conversations.”
On the investing and lending side, the multifamily sector and its various sub-sectors were widely viewed as an interesting destination for capital, given the supply-demand fundamentals.
While MSquared can complete acquisition and preservation transactions, Glen believes development still presents the biggest opportunity to drive both returns and impact.
“At the end of the day, we have a massive housing crisis in the United States and if you build it, they will come,” Glen says. “And no matter where you play in the capital stack, especially in a tough environment like today, you will need to be able to structure creative deals with developers who can perform.”
The public sector, Glen adds, is more focused on this issue than ever. “Leveraging public sector resources is incredibly hard and very bespoke but that is where the magic is,” she says. “If you have flexible capital and are willing to roll up your sleeves, it is a huge opportunity. There will be more opportunities when the government comes knocking and if you know how to do that it is a huge advantage.”
There is an undercurrent of sentiment in the US equity and debt markets that the current environment of economic, national and geopolitical instability means DE&I and ESG issues are less important than they would be in calmer times. That, however, should not be the case, panelists note.
“There are times when it is at the forefront of people’s minds but there are times when people believe ‘the economy is bad, let’s not focus on that right now,’” Borok says.
But these questions are still front of mind for BGO, which made a commitment several years ago that two-thirds of its hires would be women or minorities, Borok says.
“There are always challenges with bringing together and managing people with diverse backgrounds, and this was especially true during the pandemic. However we’re pushing forward given our commitment to being a steward of DE&I in our industry,” Borok says.
The diversity issue facing commercial real estate is a microcosm of a broader issue across all industries, Jones says. The problem is, however, that there are very few levers to pull to increase representation.
“When we look at the CEOs of public companies, women and black people are still very underrepresented,” Jones says.
“It is a man’s world in real estate, and 75 percent of the people who fill senior jobs are white men. We need them to understand and care about these issues.
“I find that when we don’t say anything, very few of us are able to break through. When I find white male CEOs with mothers, daughters and wives, I talk to them about these issues.”
Schiff, who serves as the vice-chairman of Young Presidents Organization’s global real estate network, says the Irving, Texas, global networking group adjusted the upper end of the age limit – but not the qualifications – for membership for women to encourage more female membership. Still, there remain hurdles for women to join, including the simple number of women who are CEOs or presidents.
“One of the ways to move the needle is to change some of the entry points, such as age, around the edges,” Schiff adds.
Panelists praised the impact of mentorship, but Borok took the idea one step further.
“Mentorship is great, but I think sponsorship is much more important,” Borok says. “With sponsorship, we have men and senior leaders helping to pull women up and help them to succeed.”
Borok cites an example from earlier in her career of a senior, male manager she worked with who consistently pushed her toward projects and meetings with the high visibility or prestige and, as a manager today, she is doing the same thing.
“I am constantly saying to the women on my team, ‘The men are in here constantly asking for more money and more responsibility, and you need to do the same thing.’ This may not always come naturally for women, but we have to figure out ways to be more vocal,” Borok says.
There is a need for women and people of color in the industry to band together to make these changes, the panelists concur.
Jones says: “We are all at a place in our careers where we can give voice. Early in my career, I assimilated and tried to keep my head down and be smart. I’m done with what. Basis will be an example of what change looks like. Still, I am very scared for the women and people of color behind me because I don’t see a pipeline.”
The commercial real estate market is seeing multiple headwinds, with panelists citing the impact of economic, geopolitical and social upheavals.
Despite strong pockets of success and goodwill, the panelists cite multiple headwinds, including anti-ESG movements and companies and chief executives who have not followed through on commitments to hire and invest with diverse people.
“After the murder of George Floyd [in 2020], there were many CEOs who made pledges to increase [their work with diverse people] but that has not happened,” Jones says.
“Investing with diverse folks, having lender partners who are diverse, caring about the racial wealth gap or the wage gap between men and women – these are all issues that are going backwards right now. I believe we will have to continue to be out there and continue to be vocal.
“I have never felt more concerned than I do now with what is happening, geopolitically and nationally. I am very afraid that in these downturns and cycles, ethnic minorities get pushed down further and what I am hearing now is that there are big issues to worry about, with the economy.”
Glen raises the need for women and people of color in the industry to be more vocal about what they need, but also cautioned against the potential impact. “We have to become more militant and strident, but no one is comfortable with that persona, of being the shrieking, hysterical women. But we should be shrieking because what is going on is not okay,” she says.
There is a certain leap of faith entrepreneurs must take, even if the opportunity set is clear – and the capital is available.
For Glen, it was about taking the chance to continue what she’d been doing for most of her career, just in a different way. “I thought, ‘I’m in my early 50s, I’m talking about women and entrepreneurs, and if people like me don’t have the chutzpah to do this now, what am I doing?’ I saw this huge opportunity that there were few women in real estate private equity and there were even fewer who understood in a deep way the intersection between impact and real estate,” she says.
“At the end of the day, I realized I could build a team that reflects my values and mentor the women and people I want to mentor and build it slowly and effectively.”
Founder and managing principal, MSquared
Glen founded MSquared, a women-owned real estate impact platform focused on mixed-income, mixed-use projects which promote affordability, sustainability and diversity. A former New York City deputy mayor from 2014 to 2019, Glen spearheaded the financing and development of more than 125,000 affordable homes. Previously, she was the head of the Urban Investment Group at Goldman Sachs and co-led the firm’s 10,000 Small Business Initiative and filled other senior roles in government.
Managing director, Waterfall Asset Management
Unti, who heads Waterfall’s commercial real estate equity strategy, has more than 25 years of commercial real estate experience across numerous disciplines. She started her career at Heller Financial and filled a senior role at Capmark Investments before joining Waterfall in 2011. Beyond her investment management responsibilities, Unti is a founding member of Waterfall’s DEI committee.
Chief executive and founder, Basis Investment Group
Jones founded Basis Investment Group in 2009 at the height of the global financial crisis. The firm is comprised of 75 percent women and minorities and actively promotes opportunities and education in CRE with underrepresented groups through the BIG Foundation, which is committed to creating a more diverse and inclusive real estate market.
Chief executive, Avrio Management
Schiff, who co-founded Avrio in 2023, was also co-founder and managing partner of Mosaic Real Estate Investors and its affiliate company MREC Management and has founded several other companies during her career. At Avrio, Schiff is focused on building a commercial real estate lending platform that is overlaid with ESG principles.
Abbe Franchot Borok
Managing director and head of US debt, BGO
Borok has overall responsibility for the BGO US debt business, including management of the all core, core-plus and high-yield debt strategies. Borok also leads the management and business development activities for the US debt business. Prior to BGO, Borok filled senior roles at Amherst Capital and CapitalSource.