Private Credit Funds Eye CRE As Regional Banks Withdraw

They’re known as “shadow lenders” and they’re circling distressed CRE assets as the lenders of last resort, offering cash deals for refinancing at higher rates than the diminishing number of financial packages available from traditional banks and the bond market.

Regional banks, who are still absorbing the impact of the collapse of SVB and Signature banks, are scaling back on lending to the CRE market—regional banks originate an estimated 70 percent of the commercial real estate loans made by US banks—as they shrink their balance sheets to reduce risk, Bloomberg reported.

The other primary source of financing for property owners, the CMBS bond market, also is shutting the window on new loans. Data compiled by Bloomberg indicates that issuance of CMBS bonds has dropped 82% YOY in 2023. About $6B in new CMBS was issued in the first quarter, compared to more than $50B for all of 2022.

Private credit funds, including Carlyle, Castlelake, King Street, HighVista and Palladius, are jumping in to fill the void, offering cash deals with their stockpiles of capital, with higher interest rates than traditional source of lending.

Carlyle told Bloomberg it has deployed more than $3B, split between residential multifamily assets and the entertainment and media sectors.

The private credit players have been encroaching on banks’ corporate lending business for several years, cutting financial packages as large as $5.5B. As regional banks pull back from CRE, the private funds are poised to move in.

“Over a longer time horizon, [this] will like shift CRE lending from the banking system to private capital at higher spreads,” Ellington Management Group, a hedge fund, said in a recent report.

According to Bloomberg’s report, a broadly syndicated loan currently prices around 4.5% over the secured overnight financing rate, while a “unitranche” from a direct lender could price at over 6%.

The pickings are ripe for the shadow lenders, as a wall of CRE debt coming due is generating a wave of distressed assets.

It’s not only office building owners who are finding themselves backed into a corner by loans coming due, plunging valuations, the rising cost of debt and a lending window for refinancing that’s been slammed shut.

Multifamily owners also are feeling the squeeze. As a pending wave of $1.5T in CRE loan maturities crests in the next three years—Trepp says a record $152B in CMBS backed by rental apartment buildings will expire in 2023, $940B over the next five years—many may have no option but to hand over the keys to the property.

Green Street is estimating that apartment building values are down more than 20% from their peak. At the same time, rent growth is slowing, which means some properties with large, floating-rate mortgages no longer generate enough profits to make debt payments.