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A $1.6T investment management giant is looking to buy into the office market as owners with maturing, lower-interest loans struggle to pay them off.
Invesco is planning to inject capital into office properties, specifically in REITs, and is seeking more aggressive returns by offering double-digit annual interest rates, stronger covenants on high-yield debt and step-up payments if REITs get slashed to junk status, Invesco Head of North American Investment Grade Credit Matt Brill said on Bloomberg Intelligence’s Credit Edge podcast on May 23.
Brill said he sees a wave of metrics improving for the beleaguered U.S. office market, with tenant leases being extended and more employees returning to the workplace. This will benefit REITs, which often have higher-quality office assets in their portfolios, Brill said, but are struggling to refinance their loans as banks face more than $900B in CRE loans coming due this year.
“This is an opportunity for us to work with the banks, to work with the company, and try to figure out how much can we extract out of these companies yet still allow them to live,” Brill said. “If you take too much blood out of the patient, you kill the patient. You don’t want to do that.”
There are signs that the CRE market may have finally hit bottom. While commercial property prices were 7% down year-over-year and 21% down from the March 2022 peak, according to Green Street, prices were flat in 2024 through April.
Invesco’s bet is tied to the idea that the Federal Reserve has stopped its tide of interest rate hikes and that inflation is truly tamed.
“Our thesis is: The worst is behind us from an inflationary standpoint,” Brill said. “If the Fed cuts [interest rates] at the end of this year, if the Fed cuts early 2025, that’s fine. If the Fed puts hiking back on the table, then it kind of changes that dynamic a little bit.”
Brill said the yields on bonds today are in a “golden age,” especially with loans made to REITs with strong credit to refinance their portfolios. Once the Fed cuts interest rates, then those higher-yield bonds become more attractive to investors.
“These are opportunities that you’ll look back at in three years and say ‘I cannot believe we were getting 9.5%-10.5% for credits like that,’” he said.
Executives for the Atlanta-based money manager said earlier this year it expected to originate up to $5B in property loans this year, up from $800M through most of 2023, IPE Real Assets reported.
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