John Ockerbloom has had a wild ride. He was promoted to head Barings’ newly combined U.S. and European real estate business earlier this year at a time when higher interest rates and the pandemic ripple effects were shaking up the asset class.
Higher interest rates “created real stagnation in deal flow,” which has yet to free up, Ockerbloom said in his first interview since assuming the enhanced role. He now oversees a global team of 197 real estate professionals managing a combined $46 billion in assets under management and assets under advisement. About $4 billion of the total is AUA.
Barings invests across sectors, from core debt to opportunistic real estate and everything in between, Ockerbloom said.
"That was the vision we had when we brought the (real estate equity and debt) businesses together in the U.S.,” a couple of years ago, he said.
Then in March, Barings quietly brought its U.S. and European real estate equity and debt teams together and promoted Ockerbloom, a managing director, to head of U.S. and European real estate. The combination was “an evolutionary change” for Barings, a subsidiary of MassMutual, he said.
Ockerbloom said Barings is taking a similar research-driven, collaborative approach to investing in Europe, its second-largest real estate business, as it is taking in the U.S.
The combined teams are focusing on how to manage their portfolios “particularly as our market evolves in office and other areas” and encounters inevitable challenges, he said.
Low transaction volume
Among the challenges is the still muted transaction volume, as real estate buyers and sellers, for the most part, cannot settle on price.
Adding to the problem is that the “banks that had been substantial lenders have exited,” Ockerbloom said. “The bank lending market in real estate is really not functional,” which is a favorable trend for a lender, he said.
MassMutual has been in the real estate lending business since 1966. MassMutual’s real estate lending business ultimately was integrated into Barings in 2016 as part of a combination of MassMutual’s boutique investment management businesses under the Barings brand.
As of June 30, Barings had $29 billion in global real estate debt AUM.
Many of the transactions that are getting done are at significant discounts to the purchase price and discounts to the price expectations they had for those properties two years ago, Ockerbloom said.
While much of the distress is in the office sector, there are other areas where sellers are taking discounts. Prices are being cut on some residential and logistics properties because though demand is strong, rental growth is more muted, he said.
Debt coming due
One factor motivating price cuts, much of which is in the troubled office sector, is that debt is coming due, which is “calling the question” of whether to keep paying money to continue owning the property, he said.
According to S&P Global Market Intelligence, roughly $950 billion in commercial real estate mortgages are set to mature in 2024, peaking in 2027 at $1.3 trillion.
With mortgages maturing, property owners are not necessarily facing foreclosure. Indeed, banks in particular have been giving borrowers more time to work out their loans, he said.
“The refinance wall is not a wall but a soft barrier that is more flexible than people thought," Ockerbloom said.
Rather, property owners faced with loan maturities will decide whether now is the time to extend the loan and continue to fund the property, or whether the sounder approach is to look at other options including a sale, Ockerbloom said.
The good news for these deals is that the buyers and sellers are able to have a meeting of the minds and get the transactions done, Ockerbloom said.
“It’s healthy for the market even if it is meaningfully distressed,” Ockerbloom said.
And there could be better days to come. The expectation that interest rates will come down could bring “some equilibrium between buyers and sellers,” he said.
“I’m old enough to have seen multiple cycles and to me this isn’t new,” Ockerbloom said.
U.S. vs. Europe
In the U.S., Barings' investments tilt more toward debt than equity. The situation in Europe is quite different because there is a more functional debt market, he said.
Capitalization rates, which is the rate of return on investment property, have not changed as much in Europe as in the U.S., Ockerbloom said.
Most real estate asset classes are “functional,” he said.
“Largely, there’s a more functional office market in Europe than in the U.S.,” he said.
For instance, the number of Europeans who have come back to work in offices is meaningfully greater than in the U.S., Ockerbloom said. One likely reason is that living spaces are smaller than in the U.S., he said.
“We see really interesting opportunities in (real estate) equity in Europe,” Ockerbloom said.
The bid-ask spread, meaning the difference between a seller’s and potential buyer’s view of a property’s price, is not as wide, Ockerbloom said.
Ockerbloom and his team have traveled all over the world and investors recognize that there is more opportunity to put capital to work in Europe in the near term.
“People have the mindset that they don’t want to miss out on a great vintage, but there’s not a ton of follow through,” Ockerbloom said. “But we expect that to come.”
But for now, there’s still a fair amount of hesitance in the market, he said.
