US debt markets overtake Europe in charge toward recovery

While Europe’s domestic activity sets up a competitive scene for lenders, US liquidity and deal volume continues to thrive.

King Street Capital Management believes the US commercial real estate debt space has largely recovered faster than other key global geographies, such as Europe, with borrowers raving about the abundant liquidity.

“If you’re a very large borrower – or have a large portfolio of assets – then there are plenty [more] opportunities in the US from a lender perspective, than in Europe,” David Walch, a partner and portfolio manager at the New York-based credit-focused investment management company, told Real Estate Capital USA. “In the US, the CMBS market is thriving, and deal volume is increasing. There’s an efficiency of the capital markets here [which means it] has rebounded fast.”

Still, euphoria in the credit markets has caused spread and yield compression. “Some of that has gone too far,” Walch said. “What’s also clearly on people’s minds right now is inflation and the impact of inflation regarding financing rates and cap rates.”

The manager, with about $20 billion in AUM, invests in the US and Europe. King Street sees substantial competition from domestic lenders in the UK, Germany and France.

“Europe has [many] areas of opportunity as a lender [too] because of the lack of clear capital market, [so] you find spots to be a credit provider,” Walch added.

It is not so black and white when it comes to appetite for non-bank lenders in the US. “In America, direct lenders are more involved in places where LTV matters, [while] in Europe, it’s more acute because of the jurisdiction or capacity constraints with certain lenders.”

Something mutual for both the US and Europe is the increased investor focus on alternative real estate, or sectors that players would have otherwise had underweight allocation to. Walch cites retail, office, student housing, data centers and urban hotels as examples of such asset types.

“[In these sectors] there is more uncertainty around recovery and valuations. [This means] we can pick some spots with better borrowers, better assets, better business plans, better exposures and provide credit capital to those situations.”

Another area that’s sparked the manager’s interest is smaller-scale lending, where each individual loan wouldn’t otherwise fit into the CMBS bucket. Although, location of the asset is a crucial consideration.

“It’s important for us that we’re nimble about how trends change and that’s why we focus on high-quality assets and locations,” said Walch. “Sometimes we look into a high-quality assets in less-than-favorable markets, [and other times] less popular asset classes in [top] locations. However, we value location over the property type, as the asset can always be improved [while the location of an asset is unchangeable.]”