The pandemic forced hotel, shopping mall, and office building owners to adjust almost overnight to a harsh reality where millions of Americans stopped traveling, shopping in stores, or going to offices. This also put pressure on the huge market in which such companies raise money for their commercial real estate projects.
Although there is still great uncertainty about how the stationary economy will develop after a year or more of the disruption, investors in commercial real estate are slowly regaining their appetite. Some are hoping for better returns with interest rates close to zero, while others see new opportunities from the pandemic.
“People who were on the sidelines, so to speak, are very excited to jump in,” said Catherine Liu, a research fellow at Trepp, a company that tracks commercial real estate data.
If anything, despite signs that the pandemic is getting under control with the introduction of vaccines, the uncertainty is attracting investors because they can charge higher returns for taking risks. So far this year, investors have borrowed some sort of short-term complex debt, which is a common way for real estate developers to raise money. These financial stocks, known as secured loan commitments, contain dozens of home loans.
Secured loan commitments of approximately $ 4 billion had been issued through mid-February, up 46 percent over the same period last year, according to JPMorgan research. At the same time, new issues in the commercial mortgage-backed securities market – another type of debt that home borrowers get longer-term financing for – fell by around 8 percent.
Stoltz Real Estate Partners, a private equity firm outside of Philadelphia, capitalized on investor appetite for secured loan commitments. According to Bloomberg data, around $ 45 million was raised last month to renovate the Promenade on the Peninsula, an open-air mall near Long Beach, California.
The mall was roughly 20 percent empty, and the two largest tenants, Regal Cinemas and Equinox Fitness, stopped operating and renting due to Covid-19 last month, according to a report from Moody’s Investors Service that assessed its financial condition set security. Moody’s said that since receiving the loan, the mall’s owners had spent around $ 8 million on redeveloping some parts of the property into office space and renovating lobbies and retail suites to help make the property more competitive.
Investors like Eric Kirsch, the global chief investment officer of insurance company Aflac, see a more direct way to invest in commercial real estate, especially projects that typically require short-term financing of around three years. Demand for finance is growing, Kirsch et al., As landlords – in anticipation of permanent changes in the way people work, live, and shop – renovate and upgrade their properties while people are still largely at home.
Mr. Kirsch is betting that in addition to the bank loans and securities packaged by Wall Street, the landlords would like to borrow directly from a partnership in which Aflacs investment management branch Aflac Global Investments is investing. The company announced on Wednesday that it is planning to borrow $ 1.5 billion to fund such projects over the next several years in partnership with Sound Point Capital Management.
Apr. 25, 2021, 9:43 p.m. ET
Aflac was already present in the so-called transitional real estate market, where loans are usually granted for a few years. However, the pandemic provided an opportunity to put more money into such loans, Kirsch said.
“We believe that with the introduction of the vaccine and the return of America, the economy will pick up again, which is a tremendous opportunity in the real estate market,” he said.
Stephen Ketchum, Founder and Managing Partner of Sound Point, said, “The commercial real estate loan market has not been as strong as the corporate loan market.” He added, “If you look at other things we could invest in, it is relative extremely attractive. “
Mr Ketchum said he expected the partnership to focus on loans to apartment buildings and industrial parks. Both types of property had to be modernized during the pandemic – especially in smaller towns looking for more storage space as home deliveries became the norm and residents from larger cities have taken in.
But real estate developers of all kinds are looking for funding to prepare their buildings for what the world will be like after the pandemic ends.
L + M Development, specializing in affordable housing and mixed-use space, recently took out a three-year bank loan of $ 22 million to fund the renovation of a 140,000 square foot office building north of Yale University in New Haven, Conn.
The Larchmont, NY-based company bought the building in 2019 in a joint venture with other developers, including Goldman Sachs’ Urban Investment Group. Plans include overhauling rooftop lobbies and amenities, repositioning walls, and improving warmth – and air conditioning. L + M expects the center for life sciences around the university to develop in the long term, said Jake Pine, the company’s development director.
Although the project isn’t directly responding to the pandemic, Pine said he could see the appeal of short-term funding for building renovations as vacancy rates rose over the past year.
“If you can find a transitional lender willing to take a little risk, stay with you for two or three years, get out of Covid, or recover from Covid, it makes a lot of sense,” said Mr. Pine.