Crickets…
Portfolio manager: “Our lender wants a $100M paydown on a 60% LTV loan?!”
Asset manager: “They’re saying we’ll need to rebalance the loan if we want to exercise next month’s extension.”
Portfolio manager: “That’s not possible.”
Asset manager: “Then we’ll need to sell.”
Portfolio manager: “At what pricing?”
Asset manager: “20% below our carrying values.”
Portfolio manager: “But that will evaporate our promote.”
[crickets]
Shifting roles…
Who were the CRE villains of the last few years?
Open-end private funds like BREIT. Many of them continue to block investors from leaving. Institutional core and core plus funds are in a similar position. …on their heels until carrying values fall in line with spot market values.
Who were the heroes?
Closed-end funds and their dry powder, which many people expect will come off the sidelines, spurring transaction activity and renewed value growth.
A new reality emerging...
Properties in those open-end vehicles are generally in good shape. They're 90%+ leased and low levered. Values are down because interest rates spiked, but declines have stalled.
But rather than coming to save the day, closed-end funds may be shielding problems, and all of that dry powder could be needed for plugging holes instead of opportunistic investing.
There may be so many holes to plug--transitional properties, apartments purchased at 3% cap rates, and floating rate debt--that anyone with steady access to capital may soon face some of the best investment vintages in decades.
Kudos to StepStone Group for more insightful analysis.
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