They said it
“For lesser-quality assets, particularly in the US office market, we are seeing more evidence of things going south and lenders having to reconcile the reality of that”
Justin Curlow, global head of research and strategy at Paris-based manager AXA IM Alts, told Real Estate Capital USA this week that debt problems relating to office assets are still in their early stages
What comes next
The global commercial real estate market has yet to come to terms with the impact of the most significant interest rate tightening cycle on record – and what that means for the sector in the coming years, according to attendees at this week’s EXPO Real conference in Munich.
While the mood this year is lighter than one year ago, the market continues to be in a period of stasis in which investors have not capitulated on pricing and a wide gap remains between borrowers and lenders, attendees told Real Estate Capital USA. In the near term, market participants expect to see asset- and market-specific distress as loans come due and, over the long term, are starting to accept that the era of almost-free money is over.
Flash in the pan
The commercial real estate collateralized loan obligation sector saw a flare of activity this week with a nearly $900 million close from New York-based manager Benefit Street Partners. The Franklin Templeton affiliate closed BSPRT 2023-FL10 on September 28, marking BSP’s 10th CLO since June 2017 and the real estate market’s first multi-asset class managed CLO closed since August last year.
Michael Comparato, president of Franklin BSP Realty Trust, said the transaction gives the firm more capacity on its lines by converting a meaningful amount of warehouse liabilities to a non-recourse, non-mark-to-market liability structure. “The pricing of this deal is wider than many of the deals done in 2021, but this worked for us because as one of the more active originators in the real estate credit space in 2023, FBRT has been closing new deals that take into account the recent change in capital markets and current wider spreads,” a BSP spokesperson told Real Estate Capital USA.
PIMCO is vying for a top spot as one of the country’s largest real estate lenders after holding a $3 billion final close for its second fund focused on the sector. PIMCO Commercial Real Estate Debt Fund II is more than double the size of its 2020 predecessor [trial or subscription required] and represents the single-biggest private real estate debt fund raised so far this year, according to affiliate PERE data.
Once fully deployed, the Newport Beach, California-based manager’s vehicle should contain between 55 and 65 positions, according to a document by Pennsylvania Public School Employees’ Retirement System. Recommending a $200 million investment in the vehicle, the $69.4 billion pension identified an opportunity for Fund II to help replace a receding bank lender based in the US, a trend compounded by the country’s regional banking crisis earlier in the year.
Commercial real estate capital markets have been slow to regain momentum following the Federal Reserve’s 500-plus basis points of rate hikes over the last year and senior executives speaking at New York-based trade organization CRE Finance Council’s Capital Markets Conference this week do not expect that tune to change soon.
Real estate division leaders at firms including New York-based managers Morgan Stanley, Goldman Sachs, Nuveen and BlackRock, among others, said while there may have been some belief in a rally back to form earlier this year, most firms now expect activity to remain muted for the next six to nine months at minimum, with some placing a two- to three-year estimation on the full comeback of real estate capital markets. Across the conference, the broad sentiment was that commercial real estate markets are still in the early stages of repricing, valuation stabilization and, ultimately reconfiguration.
October/November issue live now
The latest issue of Real Estate Capital USA is live now and features a deep-dive cover story on how the US commercial real estate industry is grappling with a future filled with lower leverage than the past 15 years. The full October/November issue can be downloaded here, including additional analysis on how current mortgage rate spreads are keeping debt markets constrained, and what the Federal Reserve’s interest rate outlook means for transaction activity heading into the final months of 2023.
The ratings of US life insurance companies are not expected to see an impact from their exposure to commercial real estate mortgages, even with the potential for a mild recession in the second half of 2024, according to a report this week from Fitch Ratings. The New York-based rating agency cited diversified, high-quality portfolios, conservative underwriting and the effective management of assets and liabilities.
Life insurers’ exposure to the sector is mainly through commercial mortgages, which comprise about 13 percent of portfolios. The average LTV at the end of 2022 was 54 percent. Because of this, insurance company lenders are better braced than other lending institutions, including national and regional banks, which maintain larger exposures. This insulation provides more room to be opportunistic lenders on their own terms relative to other private credit managers.
New York-based data provider Trepp this week tracked a rise in the commercial mortgage-backed security loan delinquency rate in August to 4.39 percent, a 14 basis-point increase from July. The uptick was attributed to a sharp increase in the office delinquency rate, which rose from 5.07 to 5.58 percent during the month. Trepp’s CMBS special servicing rate similarly rose five basis points in August to 6.67 percent, marking the seventh consecutive monthly increase.
Stav Gaon, head of securitized products research and strategy at New York-based investment bank Academy Securities, said though it is not a good sign that more CMBS loans are transferred to special servicing, it is the first step to deal with the situation and explore space for loan modifications. “It’s not surprising to see the elevated special servicing rate, the real question is: what’s next?” Gaon said, adding that uncertainty of the market outlook combined with today’s rate environment further complicates office loan workouts.
With multifamily sponsors and owners continually seeking non-bank capital sources to refinance their assets, government agencies and insurance lenders are increasing their attention toward recapitalization efforts. Irvine, California-based multifamily investor Advanced Real Estate and San Mateo, California-based apartment investor Prometheus Real Estate Group each tapped into non-bank lenders this week. McLean, Virginia-based agency Freddie Mac provided a loan to the former and undisclosed insurance company lenders worked with the latter.
Real Estate Capital USA first reported the $142 million and $119 million refinancings for Advanced and Prometheus, respectively. Both deals were arranged by Bloomington, Minnesota-based capital markets specialist Northmarq and exemplify how asset managers are tackling segments of the looming $1.5 trillion commercial real estate debt maturity wall on the horizon.
Capital costs expected to rise
Commercial real estate market participants are expecting the cost of capital next year to rise and its availability expected to drop, according to Deloitte’s 2024 Commercial Real Estate Outlook. The firm, which surveyed 750 commercial real estate chief financial officers globally, also found that economic concerns will drive decision-making through the next 12-18 months.
TruAmerica’s international expansion
Los Angeles-based investment manager TruAmerica Multifamily this week added Rob Kukulka to its capital markets team as a capital markets adviser for the Middle East region. Kukulka will be based out of the firm’s Chicago office and will focus on expanding TruAmerica’s capital markets and investor relations presence across the Middle East, according to an October 4 announcement. Kukulka brings more than 35 years of industry experience to the role and was most recently based in Abu Dhabi as the Abu Dhabi Investment Authority’s global head of capital markets and deputy CFO for ADIA’s real estate and infrastructure division.
Loan in focus
Post Brotherly love
Paris-based bank Societe Generale and New York-based manager Rockwood Capital this week originated a $312 million refinancing package for the first phase of a mixed-use residential asset in Northern Liberties, a Philadelphia submarket.
The single asset, single borrower financing for Philadelphia-based developer and investment firm Post Brothers represents the largest such commercial mortgage-backed securities loan for a market-rate property this year, per MSCI Real Capital Analytics data.
Post Brothers’ flagship property, Piazza Alta, has leased all 695 apartments and 37,000 square feet of retail space since opening in mid-2022. In addition to studio and penthouse apartment units, the master planned residential property includes private and public amenities such as two pool clubs, a fitness center, co-working space and on-site dog park. The in-progress second phase of project construction will add about 400 more units to Piazza Alta.