Skip to main content
MENU
Subscribe
  • Sign Up Free
  • LOGIN
  • Subscribe
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Face to Face
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2023 Defined Contribution East
    • 2023 ESG Investing
Breadcrumb
  1. Home
  2. ALTERNATIVES
December 12, 2011 12:00 AM

$789 billion in debt starting to flow into real estate market

Arleen Jacobius
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Leveling: Jeffrey Giller said executives don't expect a big recovery in property values.

    It is the moment real estate investors have been anticipating since the beginning of the recession.

    Banks finally are beginning to sell off about $789 billion in real estate debt that is estimated by researcher Trepp LLC to be coming due within the next five years. In all, banks, insurance companies and other lenders, along with commercial mortgage-backed securities, have a total of $1.2 trillion coming due in the next three years, according to Trepp.

    Investors have sunk billions into a variety of funds, separate accounts and other vehicles aimed at this investment opportunity that seemed to be just around the bend when the crisis hit in 2008. An aggregate of $115.7 billion was raised in 203 funds over the past five years, according to London-based alternative investment data provider Preqin. Today, there are real estate debt funds attempting to raise a combined $44.7 billion, Preqin reports.

    But instead of quickly selling off the debt during the recession, banks extended the maturities on commercial real estate debt, hoping for a better market. It appears the summer's collection of economic catastrophes — including the European debt crisis and the credit downgrade in the U.S. — have caused banks to lose faith in a recovery and they are beginning to sell.

    “Until last summer, many banks were rewarded by not selling non-performing loans because property values were increasing,” said James Walker III, managing partner at New York-based private investment firm Fir Tree Partners.

    So after three years of waiting, banks are selling off debt, either to new investors or back to the properties' owners. One of the biggest deals so far was the sale of Anglo Irish Bank Corp.'s $9.5 billion portfolio of U.S. real estate debt to private equity firm Lone Star Funds and banks Wells Fargo and J.P. Morgan Chase & Co.

    Bank of America Corp. is selling a commercial real estate loan portfolio valued close to $1 billion to a partnership of real estate investment firms Square Mile Capital Management LLC and Canyon Capital Realty Advisors LLC, and money manager Invesco Ltd.

    Another look

    “The market volatility beginning this past summer has led banks to rethink holding commercial real estate loans, and we have seen an increased number of banks willing to sell at values that are more reflective of today's market,” Mr. Walker said. “In the last 30 days, we've seen a real shift in the number of opportunities that have come from banks, both large portfolio sales as well as smaller distressed loan pools.”

    This new attitude is prompting banks to work with borrowers, said Jeffrey Giller, managing partner and chief investment officer of San Francisco-based real estate investment firm Clairvue Capital Partners.

    “We are seeing a lot (of debt sales) indirectly through managers who are buying back their debt from lenders,” Mr. Giller said. “We are seeing that activity increasing.”

    Clairvue Capital does not buy distressed debt but recapitalizes properties. The firm will step in to provide capital to managers that need the funding to buy back the debt on their properties.

    Other investment opportunities are expected in the near future.

    “With the unprecedented volume of debt scheduled to mature over the next five years, there will be a need to provide different forms of financing, refinancing or restructuring on all the overleveraged properties,” said Scott Farb, managing principal-Los Angeles for the consulting firm Reznick Group PC. “In the low rate environment that we're currently in, in many cases, debt investments can generate equity-like returns.”

    Whether banks are selling debt to new owners or are selling it back to the property owners, the reasons are the same: the need to reduce leverage and increase liquidity.

    Regulations in the U.S. and Europe are causing some banks to trim the debt on their balance sheets.

    “Banks have an increasing need to delever and build their capital ratios,” Mr. Giller said. “Banks weren't selling because they were hoping for a recovery (that would cause the) market value of debt to increase.”

    The widespread view among banks officials now is that there is not going to be a robust recovery in property values.

    “Valuations are expected to increase to a minor degree, if at all, and will be flat because the economy is anemic,” Mr. Giller said. “Lending institutions are ... less confident there will be robust recovery and that they need to get on with delevering programs.”

    Added Mr. Walker: “It seems that since the volatility (in the markets) began in August, the pendulum has swung, which has resulted in the phone ringing.”

    Fir Tree executives are aiming at the smaller end of the real estate debt market.

    “We have seen the most attractive deals in assets valued below $40 million,” said Jarret Cohen, head of private real estate at Fir Tree.

    More opportunities

    The loan sales by banks will likely present many investment opportunities, Anthony Frammartino, Cleveland-based principal with real estate consulting firm Townsend Group, said in an e-mailed response to questions.

    He added that these include the “i) the opportunity to buy discounted and/or distressed loans from banks for managers, or ii) also the opportunity for managers offering lending strategies (a proliferating universe) to facilitate borrowers in recapitalizing their portfolios.”

    While the new deals represent a significant increase, the avalanche that investors and managers anticipated in 2008 has not materialized, said Ryan Krauch, principal at Los Angeles-based real estate investment management firm Mesa West Capital.

    It's more like a “slow drip,” which has its benefits, he said.

    “In a slow-drip environment, you have a nice, orderly movement of capital and wind-up of assets. It is very manageable,” Mr. Krauch said. “If there were an avalanche, given that we are shy of capital, it may be hard to handle and it could hurt values.”

    At this point, investing in debt is a better investment bet than investing in real estate equity, said Fir Tree's Mr. Cohen.

    “For us it makes more sense to invest through the debt. By doing so, we are crafting a low basis in the asset, which should provide a margin of safety if things go bad in the world,” he said. “For (equity) assets that are easy to understand like a high-rise apartment building in New York City, the operational strategy can be safe, but pricing may be too high, which presents a different kind of risk.”

    Related Articles
    Money managers queuing up to buy real estate debt
    Real estate assets back on upswing
    Recommended for You
    ONLINE_190529857_AR_0_WWPEWVXMXAAN.jpg
    Alternative assets generally saw a banner year in 2022 – Preqin
    bunch_of_benjamins_100_dollar_bills_1550_i.jpg
    Ariel Alternatives raises $1.45 billion to fund diverse company founders
    Pile_Of_Dollars_i.jpg
    New Enterprise Associates closes 2 venture capital funds at $6.2 billion
    The Institutional Investor's Guide to ESG Investing
    Sponsored Content: The Institutional Investor's Guide to ESG Investing

    Reader Poll

    January 25, 2023
    SEE MORE POLLS >
    Sponsored
    White Papers
    Show Me the Income: Discovering plan sponsor and participant preferences for cr…
    The Future of Infrastructure: Building a Better Tomorrow
    Fulcrum Issues: Equity Returns and Inflation — Choose Your Own Adventure
    What Matters Most in Considering a Private Debt Strategy
    Why pursue direct lending in the core middle market?
    Research for Institutional Money Management
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    December 12, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Face to Face
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2023 Defined Contribution East
      • 2023 ESG Investing