Morning Calm Management is rolling out a $500 million joint venture targeting structured debt investments in the office sector to help fill the financing gap left as banks, life insurance companies and debt funds have pulled back on lending.
The Boca Raton, Florida-based manager formalized its entry into the commercial real estate debt business through an April 17 partnership with an undisclosed $50 billion global investment manager. The partners are planning to originate loans of $25 million to $100 million-plus to acquire senior and mezzanine loans, B-notes and preferred equity investments linked to Class A office assets in top US metropolitan markets.
Mukang Cho, chief executive officer and managing principal at MCM, told Real Estate Capital USA he expects the firm to be active up and down the capital stack with the new joint venture. “We have a unique perch given the depth of experience and expertise in certain asset classes – office being one of them,” he noted. “We are able to assess, underwrite, perhaps even mitigate and manage risk as it relates to office assets in a way that is different from a traditional lender that really has not been a subject matter expert.”
The venture, Morning Calm Office Finance (MCOF), aims to help provide financing flexibility at a time when office financing has been increasingly difficult to source. Cho said MCOF will be able to look at situations other lenders may shy away from and pursue opportunities the venture views as misunderstood, mispriced or mislabeled.
Trepp data shows there is a projected $566 billion of office debt maturities set to hit over the next five years. Real estate industry analysts have previously told Real Estate Capital USA this wall will force subsequent refinancings, recapitalizations or sales and subsequently require new debt capital from a thinned herd of active lenders.
MCOF’s investing scope includes the top 30 US Metropolitan Statistical Areas and focuses on class A office assets in high-barrier markets backed by strong fundamentals. MCM’s move arrives on the heels of increased office distress seen recently with firms such as Brookfield Properties and Pacific Investment Management Company.
Cho said the joint venture is hoping to be part of the solution for sponsors facing a difficult path forward, as well as others who own performing office assets that have subsequently been challenged by capital markets volatility in more recent months and quarters. “We can offer a pretty creative, flexible approach because a lot of situations are not black and white and certainly are not lacking in nuance,” he added.
Both Morning Calm and its partner will participate in financing using a predetermined split. While the initiative marks Morning Calm’s first foray into commercial real estate lending, he noted that the firm’s partner has experience in the field.
Beyond gap financing to keep office assets intact, office-to-residential conversions have also been posited as an avenue for the sector to find new life through redevelopment. GFP Real Estate, Metro Loft Management and Rockwood Capital marked one of the more recent and sizable conversion deals with their joint venture’s $536 million loan from MSD Capital and Apollo to acquire and redevelop 25 Water Street in New York City’s Financial District.