The pandemic forced owners of hotels, shopping malls and office buildings to adapt almost overnight to a harsh reality in which millions of Americans no longer traveled, no longer shop in cities. stores or no longer went to offices. It has also depressed the large market where these companies raise funds for their commercial real estate projects.
While there is still a lot of uncertainty about how the brick-and-mortar economy will work after a year or more of disruption, investors in commercial real estate are slowly regaining their appetites. Some hope to find better returns with interest rates close to zero, while others see new opportunities generated by the pandemic.
“People who have been kind of left out are kind of anxious to go back,” said Catherine Liu, research associate at Trepp, a company that tracks data on commercial real estate.
If anything, the uncertainty – despite signs the pandemic is under control as vaccines are launched – is attracting investors as they may demand higher returns for taking risks. So far this year, investors have accumulated a complex type of short-term debt that is a common way for real estate developers to raise funds. Called guaranteed loan bonds, these financial securities include dozens of home loans.
About $ 4 billion in secured loan bonds were issued in mid-February, a 46% increase from the same period last year, according to a JPMorgan study. At the same time, new issues in the market for commercial mortgage-backed securities – another type of debt in which mortgage borrowers lock in long-term funding – fell by around 8%.
Stoltz Real Estate Partners, a private equity firm located outside of Philadelphia, benefited from investor appetite for secured loan bonds. It raised about $ 45 million last month to renovate Promenade on the Peninsula, an outdoor mall near Long Beach, Calif., According to Bloomberg data.
The mall was about 20% vacant and its two largest tenants, Regal Cinemas and Equinox Fitness, “have gone out of business and stopped paying rent due to Covid-19,” according to a Moody’s report last month. Investors Service, which rated Security. Moody’s said that since obtaining the loan, the owners of the mall have spent around $ 8 million to redevelop parts of the property into office space and renovate lobbies and retail spaces to increase competitiveness. of the property.
Investors like Eric Kirsch, the global investment director of insurance company Aflac, see a more direct route to investing in commercial real estate, especially in projects that typically require short-term funding of around three years. . The demand for financing is heating up, said Kirsch and others, as homeowners – in anticipation of permanent changes in the way people work, live and shop – renovate and improve their properties as people are still largely at home.
Mr. Kirsch is betting that in addition to bank loans and securities provided by Wall Street, owners will want to borrow directly from a partnership in which Aflac’s investment management arm, Aflac Global Investments, invests. The company said on Wednesday that it plans to lend $ 1.5 billion to fund these projects over the next two years in partnership with Sound Point Capital Management.
Aflac was already present in the so-called transitional real estate market, where loans are typically made for a few years, but the pandemic has presented opportunities to invest more money in such loans, Kirsch said.
“We believe that as the vaccine is rolled out and America gets back on its feet, the economy will come back strong and with that, it’s a huge opportunity in the real estate market,” he said. -he declares.
Stephen Ketchum, Founder and Managing Partner of Sound Point, said, “The commercial real estate lending market has not been as strong as the business lending market.” He added, “When you look at other things that we could invest in, it’s extremely attractive on a relative basis.”
Mr Ketchum said he expected the partnership to focus on loans to multi-family housing units and industrial parks. Both types of properties have had to be modernized during the pandemic – especially in smaller towns that have sought more warehouse space as door-to-door deliveries become the norm and have caused residents to leave large cities.
But real estate developers of all kinds are looking for funding to help them prepare their buildings for what the world looks like once the pandemic has subsided.
L + M Development, which specializes in affordable housing and mixed-use spaces, recently entered into a three-year, $ 22 million bank loan to finance the renovation of a 140,000 square foot office building just north of Yale University in New Haven, Conn.
The company, based in Larchmont, New York, purchased the building in 2019 as part of a joint venture with other developers, including the urban investment group of Goldman Sachs. Plans include overhauling entrance halls and rooftop amenity spaces, repositioning walls, and improving heating and air conditioning. L + M expects the life sciences hub around the university to continue to grow in the long term, said Jake Pine, director of business development.
While the project is not directly in response to the pandemic, Mr Pine said he could see the allure of short-term funding to repair buildings as the vacancy rate increased over the past few years. year.
“If you can find a transitional lender willing to take a little risk, stay with you for a period of two or three years, allow yourself to come out of Covid or bounce back from Covid, that makes a lot of sense,” M said. Pine.