Term Sheet: Steady base rates shifts focus to 10-year Treasuries; CDPQ outlines Otera and Ivanhoé Cambridge integration; REC USA’s February-March edition live now

Unchanged rates shifts focus to 10-year Treasuries, REC USA hears; Caisse de dépôt et placement du Québec's strategy shift includes the internalization of lender Otera Capital as well as property company Ivanhoé Cambridge; February-March edition of Real Estate Capital USA magazine debuts with central focus on all-weather managers; and more in today’s Term Sheet, exclusively for our valued subscribers.

They said it

“There are assets that have declined in value and you’re in a world where there is limited, if any, financing available” 

David Roth, co-head of New York-based private equity firm Ares US Real Estate, speaking to Real Estate Capital USA about the office sector’s continued struggles and need for gap capital, especially for Class A- and B+ properties.

What’s new

On hold: The Federal Reserve did not cut interest rates at its meeting this week. (Source: Getty)

Holding course

The Federal Reserve this week opted to keep interest rates unchanged at its January 31 meeting, a move that surprised only the most optimistic lenders in the commercial real estate market. “We are not declaring victory at all at this point. We think we have a ways to go,” said chair Jerome Powell during the January 31 press conference. The central bank intends to maintain interest rates between 5.25 and 5.5 percent until the US economy is sustainably moving toward the Fed’s 2 percent inflation target, he added.

While the central bank’s outlook continues to be important, the direction and stability of the 10-year Treasury is emerging as a more important bellwether for commercial real estate lenders. “How much of cashflow and NOI generated by a property needs to go toward covering cost of debt and how much cashflow is available to go to equity, and at what rate equity cashflows are discounted, are all tied to the 10-year Treasury. That is where the game is played,” Ali Meli, founder of Greenwich, Connecticut-based private credit manager Monachil Capital Partners, told us yesterday.

Canadian combination

The Caisse de dépôt et placement du Québec (subscription to affiliate title PERE required) has become the latest Canadian state pension provider to determine it is better to run a real estate business internally than be the parent of an externally managed organization. Last week, CDPQ announced it would internalize its real estate lending firm Otera Capital, which manages C$29.7 billion ($22.2 billion; €22.1 billion) in assets, and Ivanhoé Cambridge, a real estate business with C$77 billion of assets under management. The integration tracks with similar plans by the Ontario Teachers’ Pension Plan Board which announced last year to internalize its own external property firm, Cadillac Fairview.

Rana Ghorayeb, president and chief executive officer at Otera, will continue overseeing the lending group and working on CDPQ’s executive committee as part of the integration. Otera did not comment at the time of publication on the Montreal-based lender’s headcount plans or if any other senior executives would be affected by the integration. Ivanhoé Cambridge, however, will see its chief executive officer Nathalie Palladitcheff depart after the transition is completed.

Double play

While some national banks continue to taper new originations, New York-based JPMorgan Chase this week showed why it has remained on top of leaderboards. Across two transactions, JPMorgan supplied $426 million of financing to expand its retail, apartment, office and lab exposures. According to Real Estate Capital USA’s Lending Data Snapshot, the originations helped put the New York bank on an activity level with Little Rock, Arkansas-based Bank OZK, which kicked off its year with a series of $100 million-plus financings.

The larger of JPMorgan’s two deals was a $245 million refinancing package for two Miami-based firms, developer Terra and investor and manager Grass River, on Grove Central, a mixed-use retail and apartment project in Coconut Grove, Florida. The second financing comprised a $130 million senior mortgage and $50.5 million mezzanine loan for Los Angeles-based manager Preylock Holdings to finance Nvidia’s headquarters in Santa Clara, California.

February-March edition live now

Built for the elements

The latest issue of Real Estate Capital USA is live now, featuring a cover story on how all-weather managers that can invest across debt and equity are gearing up for what could be a monumental combination of lending and investing opportunities. Featuring conversations with senior executives at KKR Real Estate, Brookfield, Ares Real Estate, PIMCO and Goldman Sachs among other managers, the analysis dives into how leading private real estate firms are adapting to an environment affected by higher interest rates and lower valuations. Access the magazine here.


New York Community Barometer

The most recent earnings report from New York Community Bank, a regional lender which acquired a portion of the $33 billion portfolio of Signature Bank last year, could provide some insights to commercial real lenders and investors. The New York bank has significant exposures to the office and multifamily sectors and its earnings report, released on January 30, stated it had increased its allowance for credit losses to $992 million as of the end of 2023. By comparison, the bank had set a $619 million allowance for credit losses as of the end of the third quarter of 2023.

The bank is responding to weakness in the office sector, the potential for repricing its multifamily portfolio and a rise in so-called classified assets – or assets which have a regulatory rating of sub-standard or worse. There are several mitigating factors, however. Chief executive Thomas Cangemi pointed out the bank has more than doubled in size over the past two years and is both working to adjust to its new scale and align with other banks with more than $100 billion in assets.

Mezzanine in the middle

Private lenders are starting to expand their market share as they step up to refinance existing loans, provide gap financing or recapitalize existing deals. A report from Plymouth Meeting, Pennsylvania-based manager CenterSquare Investment Management published last week noted the opportunity for private capital has gained momentum, in part because of the need for gap capital as well as new senior financing.

CenterSquare has observed a shift in how much mezzanine financing is coming into play, with lenders focused on subordinate debt seeing an opportunity to originate larger loans as attachment points – the loan-to-value ratio at which a senior financing ends and a junior financing begins – shift. “For mezzanine investors, attachment points that were 65 to 75 percent a year ago are closer to 55 to 65 percent while detachment points that were 80 to 85 percent can now be as low as 70 percent,” Michael Boxer, managing director at CSIM, and his team wrote in their analysis.

Data snapshot

Falling in reverse

Commercial real estate investment in the US sunk to its lowest level since the global financial crisis, according to the latest research by data provider MSCI. Notably, 2023’s volume decreased 32 percent compared with the average annual pace of deal volume between 2015 to 2019, a period of relative market strength following the crisis.

Launch pad

More for multifamily

Denver-based manager Walker & Dunlop Investment Partners this week closed its first evergreen debt fund, a roughly $157.5 million multifamily-focused vehicle that will have between $450 million-$600 million in investment power. The firm will originate bridge loans of $10 million-$100 million, with a targeted agency exit, from the fund’s capital. The firm will target a maximum loan-to-value ratio of 75 percent and will invest nationally. Walker & Dunlop will target high-quality multifamily properties across the US and has already deployed capital in three properties in Minnesota, Texas and Pennsylvania during December, said Geoff Smith, senior managing director and head of debt at the firm.


Ares names Solomon to co-head real estate

Ares Management Corporation this week announced the promotion of Julie Solomon, global chief operating officer of Ares Real Estate, to co-head of real estate. Solomon and Bill Benjamin, the current head of real estate, will co-lead the business globally. In her role as global chief operating officer, Solomon has helped to drive the growth of the firm’s portfolio management, data and infrastructure, and fundraising efforts. Solomon’s promotion runs parallel to a slew of start-of-year senior changes at other private real estate managers tracked by affiliate title PERE, including New York-based mega-manager Blackstone and Zurich-based manager UBS Asset Management.

Loan in focus

Call for cash: 280 Park Avenue was transferred to special servicing and needs additional equity. (Source: Getty)

Equity needed

New York-based real estate investment trusts SL Green Realty and Vornado Realty Trust will need to contribute substantial equity to extend a roughly $1.1 billion commercial mortgage-backed securities loan on New York office tower 280 Park Avenue, which was transferred into special servicing last month. The interest-only, floating-rate loan, securitized in PRK 2017-280P, was originated by a group of lenders that included Deutsche Bank on behalf of the New York REITs.

The loan is slated to mature in September 2024, with an existing interest rate cap expiring last year. “Any extension will be contingent upon a substantial equity contribution to support the future cash needs of the property,” New York-based data provider Trepp reported this week, citing January remittance reports from San Francisco-based Wells Fargo, the special servicer in the transaction.

Today’s Term Sheet was prepared by Randy Plavajka with Samantha Rowan and Shihao Feng contributing