Kawa sees shift towards ground leases as out-of-favor sectors plot return  

Kawa Capital believes the current dislocation in the US commercial real estate market could mean opportunities to expand the Miami-based capital management firm’s core business of providing ground leases to commercial real estate borrowers, particularly among out-of-favor sectors which have faced challenges during the covid-19 pandemic.

“We view [ground lease capital] as an alternative form of financing [and] with a little bit of capital markets dislocation, you’ll probably see some more of that in the immediate term or near term,” Michael Corridan, a managing director at Kawa, told Real Estate Capital USA. “There’s a better matching of investor demands particularly on more operating-intensive assets and so in the long term we expect more appetite here.”

Despite ample liquidity in the commercial real estate debt markets, lenders remain selective on out-of-favor asset classes or secularly declining assets like retail and suburban office. Kawa also sees similar hesitance on some of the more operating-intensive, new core asset classes such as storage facilities as well as sectors that retail and suburban offices.

“Last year, we saw a huge opportunity in [providing] senior financing to fundamentally sound growth markets with obsolescent housing stock,” Corridan said. “In turn, the owners of these assets have increasingly turned to ground sale-leasebacks as a form of financing. On the other side of the trade, for us, we look for those types of assets where we’re willing to take a singular view on durability and intrinsic value.”

The firm, which opened its doors in 2007, started out as a credit hedge fund before entering the real estate space in 2010. It now has near-term plans to grow its team and open a New York office, all while drawing on its roots as a credit investor. Alongside ground leasing, Kawa has also been active in a range of real estate capital solutions, including in some secondary markets, bond trades, preferred equity, and development.

More broadly, Kawa has seen an uptick in appetite for real estate debt from an institutional standpoint, particularly as inflation has been in the range of 7 percent to 9 percent in recent months. Situations like this mean there can be little upside as a debt investor.

“Yet, despite all of this, fueled by liquidity, the non-bank lending market is as competitive as ever,” Corridan said. “It’s hard to understand.”