Sentiment among attendees at the New York-based trade association Commercial Real Estate Finance Council’s annual Miami conference last week teetered toward optimism, with a broad hope that potential interest rate cuts will be on deck in 2024.

With many regional and national bank lenders still absent from the debt market, there is a belief among market participants who spoke with Real Estate Capital USA at the Loews Miami Beach Hotel that private credit and other alternative lenders will be the beneficiaries when it comes to gaining fresh market share this year.

Attendees sitting in on a session at CREFC Miami.
Attendees sit in on a session at the 2024 CREFC Miami conference held at the Loews Miami Beach Hotel

The conviction around a larger alternative lending market is tied existing and emerging trends in the commercial real estate debt landscape, such as loan portfolio sales, collaborative lending deals featuring mezzanine and preferred equity components, and increasing signals of valuation resets on a broader geographic and asset class basis, attendees said.

Reaching a reset

A key concern for 2024 cited by CREFC Miami panelists and attendees was the potential for broader valuation resets this year as asset owners and borrowers come back to term with reality after deferring action on their buildings and portfolios from the start of the covid-19 pandemic in 2020 onward.

Lenders and other involved investors are now looking to be repaid based on their original investments, meaning some owners will need to either refinance, sell or find another avenue – such as entering special servicing or opting for default – to resolve their portfolio’s funding issues.

While office has been a known point of stress over the last four years and the most obvious asset class to look for distressed opportunities, the perceived reset coming is expected to reach even the most beloved of sectors.

One market participant told REC USA the multifamily sector has already started showing signs that there is more distress under the hood than some asset owners and borrowers let on. Because of abnormal clips of rent growth seen from 2020 onward in major and secondary cities, this has meant good quality assets have been touted as great or better despite there being no upgrades or work done to improve a given property so that it can keep pace with more modern and renovated units coming online.

As more multifamily owners move to sell or finance, market watchers said they expect this to act as a reset for valuations in many major and secondary US cities where multifamily has been the dominant sector for opportunity over the prior three-year span.

Attendees walking through the networking area of CREFC Miami.
Attendees walk through the networking area of the CREFC Miami conference

Package deals

Beyond opportunistic pockets of distress in the major asset classes, private credit lenders are also showing more appetite and interest in growing their commercial real estate debt presence through loan purchases, loan portfolio acquisitions and collaborative lending efforts with bank and non-bank partners.

Some market participants said they expect to see more loan portfolio acquisition opportunities akin to deals last year made by Synovus Bank based in Columbus, Georgia, Capital One based in McLean, Virgina, and Pacific Western Bank based in Beverly Hills, California. Worth noting, PacWest has since sold its entire real estate loan portfolio off in three parts and in July 2023 was acquired by Banc of California, based in Santa Ana.

Most individuals who spoke with REC USA said they feel banks will look toward partnerships with private credit lenders more in 2024 to keep lending momentum flowing, with banks and non-banks putting together structured transactions involving senior and more junior debt.

Some market participants noted there is also a greater potential for alternative lenders to work with each other to syndicate loans, like what banks have traditionally done.

Regardless of the Federal Reserve’s decisions to hold or reduce interest rates this year, market participant sentiment largely veered toward the positive, especially for private credit lending outfits that seem poised for a year of opportunity relative to their bank lending counterparts.