Asset management giant PIMCO has held a final close for its second US commercial real estate debt fund, demonstrating the demand from institutional capital to be part of a wave of alternative lenders in the sector.
The Newport Beach-based manager has closed its PIMCO Commercial Real Estate Debt II on $3 billion, according to a source familiar with the vehicle. The fund was previously reported to have reached $2.8 billion in the summer, but PERE has since learned that the fundraising edged higher.
The final close amount hits the higher end of a target set by the firm of between $2 billion and $3 billion. It also means PIMCO has completed a successor raise of more than double the size of the firm’s maiden vehicle for the series, which closed on $1.25 billion in 2020.
The fundraising is also the single-biggest for a private real estate debt fund so far in 2023, according to PERE data, which previously showed three consecutive years of rising aggregate capital raised for closed-end funds. Last year, almost $48 billion was raised for the strategy across 80 funds. Just 13 dedicated funds were recorded as closing in the first half of this year, comprising little more than $6 billion.
Nonetheless, PIMCO’s capital haul demonstrates that there remains appetite from institutional investors to participate in an expected surge in demand for alternative financing in a market where bank lenders are pulling back.
Indeed, PIMCO released a white paper in June outlining an “unprecedented potential in real estate debt” in which a “tsunami” of maturations, including $1.5 trillion in the US, are slated through 2025.
There is currently reduced commitment from traditional bank lenders to issue debt to commercial real estate borrowers in today’s higher interest rate environment. This sentiment was compounded following the US banking crisis earlier this year, when real estate was flagged as a reason for weaker bank balance sheets. As a consequence, there is an expectation alternative lenders like PIMCO will fill the void.
In a document approving a $200 million equity commitment to PIMCO CRED II, Sean Sarraf, senior investment professional at the US pension Pennsylvania Public School Employees Retirement System, wrote: “Approximately one-third of the previous top 20 loan originators have exited the market and commercial mortgage-backed securities originations have compressed, falling over 60 percent from peak levels in 2008. This ongoing supply-demand imbalance has only widened in recent months.”
Sarraf continued: “Moreover, fallout from the collapse of Silicon Valley Bank has constrained regional banks which account for a disproportionate share of overall US commercial real estate activity, in effect sidelining a large source of private loan origination.” Following PSERS’ commitment to PCRED II, the pension will have an allocation to real estate credit exposure accounting for 10 percent of its private credit assets.
PCRED II is expected to generate between 8 percent and 10 percent net IRR from loans issued to “defensive, diversified… primarily first mortgage” opportunities, although mezzanine, preferred equity, B-notes and other structured investments or special situations could feature.
Debt will be predominantly be issued on floating rate coupons with loan-to-values of between 60 percent and 75 percent, typically on a term of between two and five years, according to the PSERS document. The first fund is understood to be generating net IRRs of approximately 10 percent, in line with its target.
Lending on the popular sectors of residential, logistics and life sciences are expected to feature, as will hospitality and offices. The fund is anticipated to contain between 55 and 65 positions when fully deployed. PERE’s source said the fund was already more than 30 percent allocated, as of last week.
PIMCO declined to comment.