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Macro themes drive private lender competition

With a consensus set around the top property types and locations, debt fund managers at the PERE America Forum discussed ways to stand out.

Private lenders are chasing thematic investments, with panelists at the 2021 PERE America Forum telling attendees Thursday that themes emerging prior to the covid-19 pandemic have only intensified.

Dadong Yan, portfolio manager, alternative investments at MassMutual, moderated a panel at the New York conference that included Julia Butler, managing director of real estate at KKR; Jessica Lee, managing director at BentallGreenOak; Robin Potts, co-head of real estate and director of acquisitions at Canyon Partners; and Neha Santiago, head of real estate and private credit at Cerberus Capital Management.

While lending and investing in the Sunbelt is not a new theme, it is one that is being accelerated as a result of the pandemic. “If you look at the top 10 markets that are poised for the most growth in 2022, eight are in the Sunbelt,” Santiago said, citing growth drivers that include a lower cost of living.

Cerberus also believes flexibility and convenience will drive much of the opportunity in the future. “These are themes that came out of covid and are here to stay – people want flexibility in their work, home space, access to healthcare, groceries and use of retail and it will drive the way we adapt the use of real estate in the foreseeable future for many asset classes,” Santiago added.

Like its peers, BentallGreenOak focuses on thematic investments based on bigger macro changes and demand drivers. This has influenced the firm’s portfolio, about half of which is concentrated in the multifamily space.

“We do a lot of construction takeout loans where we know the markets well and we can underwrite where the rents will stabilize,” Lee said. “We have also seen gaps with the agencies this year where we can offer attractive fixed- or floating-rate debt for borrowers who want to own their assets for the long term.”

Larger loans, institutional sponsors

More borrowers are turning to debt funds and other alternative lenders as a borrowing source, the panel agreed. “Borrowers feel like they can work with an alternative lending source in a collaborative manner, that these lenders are not offering loan-to-own strategies,” Santiago said. “They are also finding these lenders to be flexible sources [who] were able to weather the storm a little better and were easier to work with than the traditional lending sources.”

KKR has been active in the life sciences sector, with the caveat that the firm will only work in the top markets with pre-eminent investors and developers. The firm has also seen an opportunity to offer larger loans.

“The competition is thinner [for larger loans] and we can focus on highly institutional sponsors,” Butler said. “We can provide a $500 million facility that offers creativity and flexibility that gives sponsors the capital they need to do what they do best and gives us the security and downside mitigation that allow us to be comfortable with our investment.”

Wider lending mandate

There has been a widening of what debt funds and alternative lenders will consider as the pandemic eases, panelists said. “Earlier this year, it would have been unheard of [for] a manager launching a hotel-only [commercial real estate] CLO and now there is one coming to market,” Potts said.

Canyon believes its focus on the bridge and construction lending space, where it will lend on senior and subordinate positions in all property types, presents a strong opportunity right now.

“We are very active in providing mezzanine debt and preferred equity where the fundamentals tend to be, in our view, one of the most attractive places to play,” Potts added. “It makes a lot of sense to be lending in a place where the return on cost to the last dollar debt basis is about 200 basis points wide of where multifamily is trading today.”

Adjacent sectors

KKR is looking closely at asset classes that are adjacent to or complementary to sectors that are performing well, like multifamily or industrial. An example of this is self-storage, Butler noted. “Self-storage is an alternative asset class where you can generate higher yields than in traditional asset classes,” she added.

Cold storage is an area of interest for Cerberus, which sees the asset class institutionalizing for the first time and believes there is substantial room for new development. “Most of the product today is hard to repurpose for what we need for today’s needs,” Santiago said. “There are also multiple drivers, including life sciences and the need for cold storage for pharma.”

Outlook for spreads

In terms of private loan originations, spreads have tightened on most property types.

“We are seeing things like multifamily ground-up construction loans pricing as tight as 200 [basis points] over LIBOR, which is pretty interesting,” Lee said. “Issuance is headed back to 2019 volumes and the trend toward alternative lenders continues due to regulatory issues and credit considerations. This continues to create opportunities for alternative lenders and debt funds that are out there.”

The consensus was that there is little room for further tightening.

“Having said that, there is so much uncertainty and we don’t know how transitory this current inflation period will be,” Lee said, pointing to the expectation of at least one interest rate hike next year. This means spreads could, in fact, tighten slightly. “As investors put capital to work, we could have some widening toward the middle to end of next year.”