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As traditional commercial real estate debt sources have dried up, more private credit funds are entering the space, seeking to take advantage of the vacuum.
Less appetite for risk and smaller balance sheets have reduced regional banks' ability to fund CRE, despite having provided roughly 70% of CRE lending in the recent past. That’s leading to shadow lenders, like private credit funds that lend their own cash and charge more interest, to step in, Bloomberg reports.
Many regional banks have limited capacity after the failures that hit Silicon Valley Bank and Signature Bank, as well as the tremors that followed for First Republic Bank. CMBS issuance has shrunk by 82% year-over-year, Bloomberg reported.
In their place, lenders like Carlyle Credit Opportunities, Castlelake and Palladius Capital Management are now eyeing CRE.
“The need for capital in these industries, coupled with changes in the credit markets overall, is creating attractive investment opportunities,” Alexander Popov, managing director and head of credit opportunities at Carlyle, told Bloomberg. Carlyle has put $1.5B apiece into multifamily and media/entertainment, he said.
Borrowers have approximately $1.5T in loan maturities coming up within the next three years, while almost a quarter of mortgages due on office properties will need to be financed during 2023.
Regional banks could soon send asset sales in receivership to the market, with distressed office and retail loans in particular danger, a report from hedge fund Ellington Management Group found.
Meanwhile, alternative lenders are already looking for opportunities with properties that have decreased in value since being purchased at the top of market values with high loan-to-value terms, Castlelake Deputy co-Chief Investment Officer Isaiah Toback told Bloomberg.
Some finance outfits are already raising funds for CRE-specific investments, sometimes looking at loans in the smaller $10M to $50M range under the belief that regional banks have entirely backed away from such deals.
One study reported by Bloomberg, from Social Science Research Network, implies that some regional banks could be deterred from offering long-term mortgages as 186 have a negative insured deposit coverage ratio. Meanwhile, Morgan Stanley analysts and strategists think banks’ aims to curb their number of long-term investments will damage CRE lending.
“Everyone’s looking at the maturity wall,” said Mark Van Zandt, asset manager King Street’s managing director and co-head of real estate. “That’s going to be the catalyst for investment opportunities and M&A, although it’ll be opportunistic as most lenders are likely to extend loans.”
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