Term Sheet: Federal Reserve sets sights on higher bank capital requirements; KKR eyes distressed opportunities in favored sectors; San Francisco grows green shoots; Invesco and Franklin BSP kick off fundraising for real estate debt strategies

The US Federal Reserve plans to create more stringent bank regulations; KKR’s Ralph Rosenberg dives into the manager’s focus on distressed assets in still-favorable sectors; San Francisco’s real estate market has cause for optimism heading into future quarters; and more in today’s Term Sheet, exclusively for our valued subscribers.

They said it

“We used to talk about cash-out refis. Now it’s cash-in refis” 

Lauren Hochfelder, managing director and co-chief executive of Morgan Stanley Real Estate Investing, speaking about the dynamics facing managers with refinancings ahead. Read the story, courtesy of affiliate title PERE, here

What’s new

Central banking focus: more stringent bank regulation is front and center for the Fed (Source: Getty)

The Fed’s new requirements
The Federal Reserve, which last week published the results of its annual stress test for banks, is calling for more stringent regulation in the sector – a shift that could result in higher debt costs for commercial real estate borrowers and reduced lending capacity for these banks. In his July 10 remarks, Michael Barr, vice chair for supervision, proposed changes that would lower the threshold for long-term debt and risk capital requirements to apply to banks with $100 billion in total assets compared with the current $700 billion mark.

“Events over the past few months have only reinforced the need for humility and skepticism, and for an approach that makes banks resilient to both familiar and unanticipated risks,” Barr said, referring to the March collapse of New York-based Signature Bank and San Francisco-based Silicon Valley Bank, and other regional banking volatility.

Banks get passing grades
Even with the likelihood of increased regulation, some positive news came out of the Federal Reserve’s stress test for banks with large commercial real estate portfolios. All 23 banks in this year’s iteration cleared the Federal Reserve’s hurdles, according to a report published this week from Toronto-based rating agency DBRS Morningstar.

The sector had preliminary stress capital buffers of 2.5-5.5 percent, the report stated. “Overall, projected CRE loss rates remain elevated but have fallen since 2020 as the hospitality sector recovered from the acute pandemic-related stress. Projected loss rates in the office sector continue to increase because of the high level of vacancies and projected further deterioration under the stress test scenario,” said John Mackerey, a senior vice-president at DBRS covering North American financial institutions.

Canyon sees debt opportunities rise
Dallas-based Canyon Partners is approaching the dislocation in the commercial real estate capital markets with a particular mindset – picking the best spots in the capital stack, Robin Potts, chief investment officer, told Real Estate Capital USA in a story posted this week. “When you have periods of volatility like this, the equity markets can take a lot longer to adjust than the debt markets. Because the debt markets tend to move first, the opportunities in the debt markets have been incredibly interesting and that is where we have been spending most of our time,” Potts said.

She explained that with traditional bank lenders pulling back, more opportunity has emerged for alternative managers to step in and fill financing gaps. “This sets up alternative lenders with the ability to do very traditional lending that was previously captured by banks with best-in-class borrowers at lower attachment points.”

Distress on trend
KKR similarly has set its sights on potential distress in highly-favored property sectors. The New York-based manager’s global head of real estate Ralph Rosenberg wrote in a white paper published last week that capital constraints are already afflicting many borrowers as more than $1 trillion of commercial real estate loans ebb closer to maturity this year and next.

“The need for liquidity and recapitalization should extend well beyond the office sector, where we have already seen the first significant defaults,” he wrote, noting that overlevered capital structures extend across property types and the most on-trend sectors. Even with rent growth and property values expected to remain steady over the medium term, cap rates and discount rates have both widened, he noted. Rosenberg said the firm has started to see a floor developing on pricing, which is now approximately 10-20 percent lower, based on gross asset value compared with before the rates rises.


Green-ish shoots
Commercial real estate lenders and investors have not yet returned to San Francisco’s beleaguered office market, but the city is seeing a handful of green shoots that could bode well for a longer-term recovery. While market participants are watching happenings closely, tepid transaction activity means there has not been much clarity on where pricing might end up, said Alexander Quinn, director of research for Northern California at Chicago-based advisory JLL, in a story posted this week on Real Estate Capital USA.

“The biggest debate is where is the bottom, if we have reached it and what does that mean? From a capital markets side, we don’t know where pricing will stand, but we are starting to get an idea,” Quinn said. “On the demand side, the question is being driven by companies that are trying to figure out if they want to be in the office again.”

New debt strategies
Benefit Street Partners and Atlanta-based Invesco Real Estate are both raising capital for commercial real estate debt strategies. BSP, the New York-based credit-focused alternative asset management arm of Franklin, launched its second opportunistic debt fund July 6 with an undisclosed target size. Michael Comparato, head of commercial real estate at BSP, has previously noted that the firm is seeing more deals that typically would have been handled by bank lenders.

Similarly, Invesco is launching a non-traded credit-focused real estate investment trust to capitalize on interest from investors in private credit strategies and the flexibility that alternative lenders currently have for boosting their market share. Charlie Rose, global head of credit for Invesco Real Estate, said the dislocation has the potential to accelerate that movement toward alternative lenders, especially firms that are nimble, responsive and relationship-oriented.

Still open for office
While some lenders and borrowers have shied away from the office sector, select institutions and managers have remained active in financing and refinancing top-of-class assets across the US. Charlotte, North Carolina-based Bank of America is the latest bank to originate an office loan, leading a five-year, fixed-rate $330 million refinancing package on a class A New York office building owned by local managers Tishman Speyer and Silverstein Properties.

Randall Rothschild, a senior managing director and global head of debt at Tishman Speyer, said the loan shows the commercial real estate capital markets are open for office buildings with strong sponsors and solid tenant relationships. As part of the deal, New York-based Taconic Capital provided additional mezzanine debt. The financing will go toward retiring an existing loan on the building and funding the costs of the existing leasing program.

Data snapshot

Outlook on distress
First quarter data from MSCI Real Assets shows the balance of distress in US real estate is currently $64 billion, as published in a July 6 Oxford Economics report. The potential distress facing the landscape is more than double that, with office the frontrunner among the sectors. Notably, apartments could see more distress than retail, the data shows.

People moves

Newmark adds senior executive
New York advisory Newmark this week hired Bill Fishel as executive vice chairman. Fishel, who joins the firm from the Los Angeles office of Chicago-based advisory JLL, will expand Newmark’s debt, equity and structured finance group. He will be responsible for raising debt and equity capital for institutional-grade assets and developments across North America, with a particular focus on structured finance.

JPMorgan promotes debt, Treasury specialist
JPMorgan Chase promoted Julie Thick to real estate banking central region market manager, the New York bank announced this week. The bank’s real estate banking business aims to provide bespoke debt solutions and treasury services products to real estate developers, investors and other market participants. She will report to Michelle Herrick, JPMorgan’s group head and managing director for real estate banking. Previously, Thick was director of national subscription lending.

Loan in focus

Made in Manhattan: Apollo Global Management originated a $114 million construction loan for a condominium project in New York City’s West Village submarket. (Source: Getty)

From the ground up
New York-based asset manager Apollo Global Management this week originated a $114 million construction loan for a condominium development in the city’s West Village submarket. The ground-up project at 140 Jane Street is being developed by New York-based investment and asset manager Aurora Capital Associates, with plans for a mix of three- to six-bedroom units.

New York-based advisory Newmark arranged the deal, which is the latest construction financing tracked in Real Estate Capital USA’s lending snapshot. Newmark’s debt and structured finance team co-presidents Dustin Stolly and Jordan Roeschlaub helped to arrange the deal. For Aurora, the financing will help expand the firm’s lower Manhattan footprint, which is already well-established across SoHo and the Meatpacking District.

Today’s Term Sheet was prepared by Randy Plavajka, with Anna-Marie Beal, Peter Benson, and Samantha Rowan contributing