Over the past year, the rise of debt funds has been a significant commercial real estate finance trend. At Berkadia, they’ve following entries into this market through their own debt fund tracker.
As of early May, Berkadia recorded close to 130 different debt funds, according to Hilary Provinse, executive vice president and head of mortgage banking at the company.
“Those are either private equity, debt fund vehicles or some operators who have raised funds where they’re investing either preferred equity or debt into different parts of the stack,” Provinse says. “So there’s just a ton of liquidity on the debt funds.”
Overall, Provinse says the amount of equity in the market drives debt. Berkadia saw a record-setting first quarter, closing approximately $3.5 billion in investment sales transactions in the first three months of 2021.
“I think that’s just indicative of the amount of transaction activity that’s out there right now, post-pandemic,” Provinse says. “When we look at investor interest in each asset, there are some deals where there will be 200 signed confidentiality agreements or interested parties, which is more than double what we have historically seen. So there’s just a lot of equity looking at the multifamily and the housing space right now.”
Fueling even more money into the residential space is the emergence of new sectors, like single-family rentals. “There is just an incredible amount of liquidity and money chasing deals in the housing space,” Provinse says.
This money is coming from a lot of places. Some of it is arriving from groups that may not have as much interest in housing in the past.
“Family offices that had historically been under-allocated in real estate are increasing allocations from fixed income and other asset classes and equities,” Provinse says.
Traditional real estate investors are also shifting more money to the housing space.
“Within housing and within the real estate market in general, you’re seeing money that would have historically potentially gone into retail and office looking for safety and stability in multifamily and in housing,” Provinse says. “I think we’ll see the long-term stability [in housing]. And I think there are still questions around office and retail about where post-COVID demand variables are going to shake out and when.”
On the pure debt side, Provinse sees a “plethora of liquidity.” Provinse says there is more competition from life companies on the higher end of the spectrum, which have a lot of money to allocate. Banks are also lending to higher quality sponsors.
On the more affordable assets, the government entities are still active.
“You have the normal agency players, Fannie [Mae], Freddie [Mac] and HUD, which were limited in their cap this year to $70 billion each,” Provinse says. “Given the amount of supply there is in the market, they’re sticking to the more mission-focused, workforce housing and affordable.”