As commercial real estate financing becomes harder to come by and CRE owners and investors face refinancing they might not be able to afford, there is a thought that private equity could offer a remedy, GlobeSt.com reports.
“Could” is the operative word here as many private-equity firms are weighing their strategies. For example, investment management company Blackstone has talked with large U.S. regional banks about providing capital for lending, the Financial Times reports. Company President Jon Gray said the arrangement could work by having a bank originate loans and Blackstone move to its insurance customers (which it does asset management for). The insurers would then pay a fee to Blackstone for sending assets in their direction.
“Rather than putting all (of the risk) on its balance sheet, maybe they keep 50 cents (on the dollar), and put 50 cents with us,” Gray told the FT.
Meanwhile, Apollo CEO Marc Rowan said “de-banking has already been happening across our country” during an early May 2023 earnings call, GlobeSt.com reports.
While there’s a lot of private-equity capital to put toward deals with banks or direct CRE lending, given the state of the industry, there’s still a lingering question of how risky investing in CRE is right now. In a different FT piece Oaktree Capital Management co-founder said private credit has gotten off to such a fast start, it’s hard to tell how good any of the deals are yet. All that’s known right now is that large asset managers that wanted business aggressively lent to private-equity groups.
“The tide has not gone out yet on private lending, meaning the portfolios haven’t been tested,” Marks told FT. “Did the managers make good credit decisions, ensuring an adequate margin of safety, or did they invest fast because they could accumulate more capital? We’ll see.”
Between Fall 2022 and the beginning of 2023, a lot of capital started to form, according to GlobeSt.com. The capital was often put in funds that weren’t familiar with CRE. Then prices increased, cap rates fell and a lot of these funds were unprepared for the damage that rising interest rates can cause.
“(Private equity) will be tested further in 2023 as already tight financial conditions tighten further, alongside the rising risks of spillovers from banking stress and an anticipated economic downturn,” Moody’s Investor Service said. “(The sector) could harbor risks that are not currently visible.”