Money center banks pulling back from the commercial real estate lending market are having a significant impact on transaction activity, said panellists at affiliate title PERE’s America 2022 Summit in New York on Tuesday.
“On the debt side, the math is quite simple. SOFR is expected to peak at 4.5 percent and spreads are expected to widen. The cost of borrowing is very expensive and the availability of capital is an issue because the money center banks are overexposed to real estate,” said Roger Morales, partner and Americas head of real estate acquisitions at KKR.
There are three reasons for money center banks pulling back, Morales added.
“The money center banks are digesting the record transaction volume that happened in 2021. They are also being forced to take reserves against their loan books,” Morales said.
Meanwhile, a dip in refinancing activity means more loans are staying on banks’ books for longer and making it more difficult for them to originate new loans. “The money center banks expect 20-30 percent of their loan books to be refinanced every year and that is just not happening.”
While the best sponsors have access to debt, pricing is not lining up with the debt capital that is available, Morales added. Additionally, about 40 percent of deals coming to market are not pricing, he estimates. “But deals are clearing in sectors people want to own in.”
Room for alternative lenders
The panel’s moderator, Kirkland & Ellis partner Kelly Ryan asked if the pullback by money center banks presents an opportunity for equity investors to move into debt, noting that there is a need for liquidity.
“Can we all fill in for the banks? The answer is probably not,” said Nicole Sermier, executive managing director and head of residential investments at Sculptor Real Estate. “I think overall, it is likely that we will continue to see really interesting credit opportunities for quite a while.”
Still, more capital will be required to deleverage positions going into the new year. “We are not in very liquid, super functioning credit markets and we are in a unique point in time where debt capital is short,” Morales said.
Mark Van Zandt, a managing director on King Street’s real estate team, said it is not as easy as fund sponsors coming in with capital to fix part of the problem. “The hardest part to find is the zero to 50 percent part of the capital stack,” he added, noting there is more capital available for the upper end of the capital stack.
King Street has been spending more time on special situations and stressed assets, with Van Zandt noting one area that is exciting to the firm is CMBS SASB bonds. There is a specific value in bonds attached to New York trophy office One Vanderbilt, which are trading at a significant discount and present a good investment opportunity today.
“At One Vanderbilt, the best building in the country, you can buy bonds at 60 percent value and make 9 percent,” Van Zandt said added.