RESEARCH • June 2024
US Commercial Real Estate Debt: the land of opportunity
Navigating the convergence of cyclical Real Estate Debt and ESG opportunities in the US Market.
The US economy has proven surprisingly resilient during the recent rapid rate-hiking cycle. US real estate fundamentals are robust, with the notable exception of the office sector, whilst the escalating impact of climate change looms large across the real estate landscape.
Real estate capital markets are going through a period of adjustment as they adapt to an era of markedly higher interest rates. Indeed, the cost of capital and the low availability of debt were key drivers of the commercial real estate market in 2023. Investment activity has been muted while market participants wait for clarity on pricing, and gain confidence that the economy is strong and inflation under control.
As the cost of floating rates bite and loans mature, more motivated sellers will emerge. This is likely to bring more liquidity to the market through a downward adjustment in prices. The market is braced for a degree of dislocation.
Against this backdrop, active lenders are in a favourable position. Firstly, commercial mortgage-backed securities (CMBS) issuance is very low and banks and insurance companies have reduced their activity markedly, leading to a squeeze in the availability of senior debt. Active lenders can negotiate favourable terms, including attractive spreads, when lending on assets that have already repriced substantially. The withdrawal of small and mid-sized banks from the market is likely to open space for non-bank lenders who can deploy capital through stretch senior and high yield strategies and be well compensated for taking on risk given that spreads have widened.
