"Investor interest in debt and preferred equity strategies is largely driven by the market opportunity, with higher interest rates, higher credit spreads, and less competition from traditional lenders creating an environment where investors can earn equity-like returns further down the capital stack," said Nancy Lashine, founder and managing partner of Park Madison Partners, a private real asset placement firm.
Peter Rogers, director, investments-Americas and head of real assets research at Willis Towers Watson, said the tighter financial conditions offer the potential for equity-like returns from real estate debt strategies such as senior debt, mezzanine debt and preferred equity.
Over the five years ended June 30, loans have had the most growth, up a whopping 375.9%, followed by mezzanine with a 44.6% increase and mortgages up 33.9%. Hybrid debt has lost ground, falling 51.7% over the five-year period.
Real estate managers are not surprised that some debt sectors have lost assets under management during the year ended June 30.
"Real estate originations across all lender groups (banks, insurance, commercial mortgage-backed securities, private credit) are down about 50% from a year ago," said W. Todd Henderson, co-global head of real estate at DWS Group. "This closely matches the decline in real estate trading activity over the past year."
However, DWS Group executives believe that opportunities for private credit will expand in 2024 as transaction activity revives even as bank lending stagnates, Henderson said.
While DWS did not fill out the sector questions of the survey, Henderson said that overall the firm had $2 billion in U.S. real estate debt as of June 30, a 9.5% increase over the previous year.
"It's never been a better time to be a lender," said Shawn Lese, chief investment officer and head of funds management, Americas, for Nuveen's real estate business. Nuveen tops the list of managers of mortgages and mezzanine for U.S. institutional tax-exempt investors.
Nuveen had $34.9 billion in mortgages as of June 30, which was flat over the year, and $6.4 billion in mezzanine, which was down 4% from a year earlier. Nuveen is sixth on P&I's list of real estate loan managers for U.S. institutional tax-exempt investors with $679 million as of June 30, down 18.4% from last year.
Real estate lending deal flows are down because transactions, which are a good source of business, are down because sellers are waiting for interest rates to fall again, Lese said.
While many property owners want to sell, with the exception of office, they don't need to sell because their real estate is performing well, he said.
"Rental growth isn't what it was two years ago ... but there is no need to do a fire sale," Lese said.
"I'm cautiously optimistic that we are getting to the point that the bid-ask spread is narrowing," he said.