Attractive assets: The New York Stock Exchange (left) and office buildings are seen in New York. PE firms want to take advantage of deep American discounts after office values fell by almost a quarter last year, more than in Europe, following the pandemic work-from-home shift. — AP
NEW YORK: Distressed investors see one of the best opportunities in a generation to buy troubled US real estate assets as the commercial property crash continues to roil the market.
Private equity (PE) firms are already positioning to take advantage. About 64% of the US$400bil of dry powder that the industry has set aside for property investment is targeted at North America, the highest share in two decades, according to data compiled by Preqin.
The fear elsewhere is that a strong US bias will mean other parts of the world won’t draw the same demand, delaying the work out of troubled loans and properties there.
PE firms want to take advantage of deep American discounts after office values fell by almost a quarter last year, more than in Europe, following the pandemic work from home shift.
Almost US$1 trillion of debt linked to commercial real estate (CRE) will mature this year in the United States, according to the Mortgage Bankers Association, and rising defaults as borrowers fail to repay will create more options for buyers of distressed assets.
“Compared with the Savings & Loans crisis and 2008, we’re still in the first or second innings” when it comes to troubled assets, said Rebel Cole, a finance professor at Florida Atlantic University who also advises Oaktree Capital Management.
“There’s a tsunami coming and the waters are pulling out from the beach.”
John Brady, global head of real estate at Oaktree, is similarly blunt about what’s ahead: “We could be on the precipice of one of the most significant real estate distressed investment cycles of the last 40 years,” he wrote in a recent note on the United States.
“Few asset classes are as unloved as commercial real estate and thus we believe there are few better places to find exceptional bargains.”
That focus means other regions could be left with bottom feeders – so called because of the low offers they typically make – as the main bidders. That risks dragging values in Europe and Asia down further, or leaving some markets stuck in stasis as sellers and lenders refuse to cave to super-lowball bids.
The strong North American economy, deeper markets and currency strength may contribute to “a delayed market recovery” outside the region, said Omar Eltorai, research director at data provider Altus Group.
The opportunity in the United States is being driven by lenders pulling away from CRE after borrowing costs rose and values plunged.
Asset manager PGIM estimates a gap of almost US$150bil between the volume of loans coming due and new credit availability this year.
“When you start to get into the cycle, the big market is where people find the opportunities,” John Graham, chief executive officer at Canada Pension Plan Investment Board, said in an interview.
For everything from private equity to private credit and CRE “the United States is the biggest and the deepest market.”
According to S&P Global Ratings, both US and European CRE are enduring “historic stress.”
Some parts of the market are facing declines in value that exceed those during the financial crisis, it said in a report, raising the risk for commercial mortgage-backed securities. — Bloomberg
