What You Need To Know About Today’s Debt Market
The abundance of real estate capital doesn’t mean that closing a deal is a no-brainer. Experienced lenders kicked off the third-annual EisnerAmper Real Estate Private Equity Summit on Sept. 30 by sharing their insights on the debt investment and opportunities.
Jeffrey Lenobel, a partner at law firm Schulte Roth & Zabel, moderated a session called “The Other Side of the Street: Debt Investment & Opportunities Power Panel.” He assured all in attendance at the New World Stages that non-regulated institutions would continue the activity despite low interest rates. In fact, cautiousness — even in the face of brief instability — was the commonality among the four panelists.
Peter Sotoloff, managing member and CIO of Mack Real Estate Group, is a transitional lender handling floating rates. He likes the recent volatility he’s seeing in the market and doesn’t mind taking the execution risk.
“In an all-time low cap rate environment, we’re very much cautious of the trends that will impact value,” he said. “The government and larger Fed behavior of keeping rates low is a leading indicator of what's to come.” The bond market’s performance failures and some unsecured and long-term debt issuances were particularly noteworthy to Sotoloff, who believes “those are all forbearers of coming to the later stages of a cycle.”
Should rates rise, Blackstone principal Michael Eglit will be largely unfazed, speculating that the impact will be minimal even at a quarter-of-a-point rate increase.
“We believe strongly in the real estate fundamentals,” he continued, adding that he feels confident about investing in the current environment, especially with institutional sponsorship. “We've seen through time that there's just more liquidity in bigger markets, where there’s better real estate.”
According to a New York Times article in January, private equity was the standout among Blackstone’s investment businesses, reporting a 95% gain in economic net income.
Spencer Garfield, Fortress Investment Group’s managing director of credit and real estate funds, actually looks forward to bumps in certain markets.
“As the bond market and CMBS hiccups, that’s when guys like us get calls,” Garfield said. “That instability in the market is the greatest thing that can happen.”
Floating rate loans are wading in the water. Jack Taylor, managing director and global head of commercial real estate for Pine River Capital Management, knows his yields will improve with increased rates, but he likes well-functioning markets to track his contemporaries’ progress.
“Low rates can be problematic for values because it puts in more supply,” he explained. “We're bullish on lending into this real estate market.”
If preparedness is any kind of predictor, it only reveals a possible glimpse of the next few years.
Garfield predicts more distressed assets coming to the market in the next 12 to 24 months, because “the writing’s on the wall. It isn’t to the lender, it’s to the equity.” He theorized that a developer who's built a $40 million project and is now building his or her first $400 million project and putting $100 million of equity in a land loan “will not be able to get that construction loan out,” which is the kind of scenario he’s monitoring.
Regulation is also helping to maintain the overall stasis, as Sotoloff believes excesses that were built up are “out of the system and remain out of the system.”
“A lot of those mistakes haven't been made,” he explained. “There will be pockets of distress. But if you look at what's going on in our space, the discipline definitely has impacted what a senior lender is going to do today.”