When it comes to originating real estate debt in the COVID-19 crisis, it's not like the last crisis, real estate managers say.
Unlike in the global financial crisis, real estate owners during the pandemic still have access to some loans, which is helping to prop up asset prices. However, since property valuations are staying at pre-pandemic levels, lenders of riskier mezzanine debt pulled back from originating loans from the start of March to June 30.
While mezzanine worldwide assets of the managers that responded to Pensions & Investments' annual survey grew by 15.4% to $22.9 billion and mezzanine assets managed for U.S. tax-exempt institutional clients rose by 14.8% to $10.5 billion in the 12 months ended June 30, the bulk of the investment activity occurred pre-COVID-19, industry sources said.
PGIM Real Estate Inc. issued no new loans from early March through June 30, even though it was very active in the space before COVID-19, said Eric Adler, London-based CEO.
PGIM Real Estate is ranked third on the list of mezzanine managers for U.S. tax-exempt institutional investors, with AUM up 19.7% to $784 million.
Mr. Adler said that until valuations drop, "there is not a lot of space for mezzanine lending."
PGIM Real Estate did not stop originating mezzanine loans because of lack of deal flow, Mr. Adler added.
"People want loans but they say their property is worth as much as it was in January," he said. "We say 'no,' values have to come down. They are waiting and we are waiting. Distress is the catalyst for borrowers and sellers to do something."
Once valuations come down, there will be a huge opportunity for mezzanine, Mr. Adler said.
However, right now there is too much liquidity for that to happen, he added.