Private credit funds can capitalise on real estate market challenges
Challenges in the beleaguered commercial real estate market could present an opportunity for private credit funds.
Borrowers have been struggling in a higher interest rate environment, while particular parts of the market such as office space have suffered due to changing working habits post-pandemic.
Traditional banks have reined in their lending, which has created “a compelling opportunity for private credit to fill the void left by lenders currently on the sidelines,” according to Rich Byrne, president of Benefit Street Partners, which manages around $75bn (£58.4bn) of assets across a range of credit strategies.
“Currently there are a lot of challenges in commercial real estate, which presents a uniquely attractive opportunity for investors with fresh capital to deploy,” he told Alternative Credit Investor.
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“Of the 50 per cent of commercial real estate loans held on bank balance sheets, 70 per cent sit within regional banks. These small banks are really struggling and are not investing any new capital. They need to preserve their liquidity to work out the troubled loans.”
Byrne explained that higher interest rates have had a lasting impact on the value of real estate, leading many commercial real estate lenders to stop or limit new loan origination.
He cited particular issues in the office sector, where a slowdown in demand has resulted in “a surplus that will need to be rationalised”. He said that this has hit the largest, most established lenders in the space particularly hard.
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“Similar to private credit in the corporate world, private credit in real estate is highly specialised,” he said. “Some of the biggest names have been the chief lenders in that space, alongside the banks. Unfortunately for many of the big, experienced legacy lenders, they are the ones caught with office exposure and are currently licking their wounds. Therefore, they are not necessarily going to be the source of new capital to take advantage of this opportunity.”
Byrne said that it is almost impossible to avoid owning office exposure if you are a commercial real estate lender, which will mean those lenders will want to hold on to cash to stay solvent.
“Markets will backfill, but it’s probably not going to be with the best managers,” he added. “It will likely backfill with whoever can raise some money. That’s the opportunity: to find the right lender and pursue that gap in the market.”
Byrne’s comments follow analysis from KKR earlier this year which suggested there is a $500bn opportunity in the commercial real estate debt market as banks retrench from lending.
This funding gap will be filled by commercial mortgage-backed securities and debt funds, the investment firm said.
