Real estate managers predict investors seeking income will find opportunities in the wave of real estate loans — mostly underlying commercial mortgage-backed securities maturing over the next three years — that will need to be refinanced or restructured.
Some $2 billion was raised in the first quarter by four real estate debt funds anticipating these opportunities. Last year, 27 real estate debt funds raised $20.4 billion, up from $15.7 billion in 2013, according to London-based alternative investment research firm Preqin.
Managers are continuing to stockpile capital for the investment opportunity.
Currently, 24 real estate debt funds are being raised, targeting a combined $27.4 billion in assets. For example, Torchlight Investorsis raising money for Torchlight Debt Opportunity Fund V, which has a $1 billion target. And Ares Management LP's real estate group took in $1.2 billion in new debt commitments in the fourth quarter alone.
Among the other real estate debt funds currently being raised are Contrarian Capital Management LLC's Contrarian Distressed Real Estate Debt Fund III, Square Mile Capital Management's Square Mile Credit Partners, and Heitman's Heitman Real Estate Debt Partners Fund, which together could raise as much as $1.2 billion.
Real estate debt managers are aiming to take advantage —by making loans or providing capital for borrowers — of the abundance of loans bundled into CMBS in the three years before the financial crisis.
“The CMBS market in 2005, 2006, 2007 was booming,” said Richard Flohr, managing director, who heads the CMBS conduit program for Prudential Mortgage Capital Co., a commercial mortgage finance business.
Much of the outstanding real estate debt comes from borrowers who for the last 10 years made only interest payments and haven't paid down any principal. As the debt reaches maturity over the next few years, principal payments will also come due.
These mortgages are not likely to be extended and are tough to refinance, managers say.
So investors are amassing capital, anticipating borrowers' need to refinance or obtain bridge financing. About $302.5 billion of commercial mortgage-backed securities is set to mature between now and 2017, data from Trepp LLC, a New York real estate research firm shows. That's more than double the $117.3 billion of loans that came due between 2012 and 2014, Trepp data show.
“We (the real estate industry) had the highest volumes of loans (originated) between 2005, 2006 and 2007,” said Ryan Krauch, principal at Los Angeles-based real estate debt firm Mesa West Capital.
The 10-year loans issued at that time are starting to come due this year. Contributing to the “wall” of loan maturities are five-year duration mortgages written in 2010 as part of the so-called “pretend and extend” phase, when loans were extended beyond their original maturities while lenders and borrowers waited for property values to rise, Mr. Krauch said.