Kairos carves out niche in smaller middle-market deals

The firm has just closed a $7.25m senior bridge loan on a San Francisco property.

Kairos Investment Management, a Rancho Santa Margarita, California-based commercial real estate lender and investor, believes smaller middle-market loans offer the most compelling origination opportunities right now.

Historic levels of liquidity in the real estate debt markets are leading many lenders to chase the biggest and most high-profile deals. This is creating profitable niches in the less exciting corners of the market, with the firm seeking out opportunities of less than $30 million, chief executive and founder Carl Chang told Real Estate Capital USA.

“There’s just a lot of available investment capital sitting on the sidelines right now. I think most of it is chasing large deals,” Chang said. “[Smaller loans seem] to be where we’re finding the most interesting deals, at least from a yield perspective, as well as from a structuring perspective.”

Chang cited a $7.25 million bridge loan the firm has just closed on a small mixed-use building at 209 9th Street near the San Francisco Bay. The size of the loan and property might not pique the interest of many high-profile lenders, but Chang sees a perfect fit with Kairo’s value-oriented strategy.

“We try to be a little bit opportunistic,” Chang said. “We’re not a small company, but we invest in areas that we think are a little bit less efficient; as one could say, a little bit less competitive. We have expertise in other areas, and we invest up and down the capital stack.”

Core market resilience

While many of the firm’s competitors have a hyper-focus on up-and-coming markets in the Sun Belt, Kairos is not giving up on more traditional urban markets, such as San Francisco. This approach fits with its philosophy of investing in what it sees as neglected value plays.

“We like the intrinsic value of that real estate long-term,” Chang said. “San Francisco is not necessarily the favorite real estate today, or the flavor of the month – but we think longer-term. It has always been very resilient. We’ve made a lot of money on the trough in San Francisco and other similar markets. And quite frankly, I have a personal affinity to San Francisco. So why not?”

The firm, which is lending in markets such as Austin, is also considering the long-term prospects for these markets. “We were early movers in Austin and in the Sunbelt. But from our perspective, some of the stuff that we were early investors in, we’ve been looking to take some profits off the table,” Chang said.

 Outlook in 2022

A member of the Board of Directors of the Los Angeles branch of the Federal Reserve Bank of San Francisco, Chang is concerned about the effect growing inflation might have on interest rates and other aspects of the market.

“Inflation is a concern we’ve been addressing in the Fed for the last three or four months. Also from our business perspective – whether it’s supply constrained issues, whether it’s labor issues – the cost of development is going up,” Chang said. “It’s something I think, eventually you’ll have to address, unfortunately, by looking at interest rates.”