As shadow lenders prep for real estate push, offices are in focus

SHADOW lending firms are preparing to push into commercial property financing as regional banks – wounded from the blowup of Silicon Valley Bank – beat a retreat. 

Among the possible entry points are office properties, especially if values continue falling and banks look to offload the loans. With few buyers willing to wade into those murky waters, lenders with the capital and know-how may find bargains.  

Banks will need to set aside more capital as office values fall, which means they may look to sell them, said Michael Nierenberg, chief executive officer of Rithm Capital Corp., a manager of real estate assets and investments. “This will create opportunities for players in the real estate private credit space.” 

Offices account for as much as a quarter of the more than US$10 trillion commercial real estate market, putting them at the centre of the market’s challenges, according to a note this week by Tracy Chen, a portfolio manager at Brandywine Global Investment Management. 

Offices also comprise a big part of the US$1.5 trillion in commercial real estate debt that’s due for repayment by 2025. Nearly a quarter of mortgages on office buildings need to be refinanced just this year, according to Mortgage Bankers Association data. 

Even so, distress isn’t permeating the office sector, at least not yet. Default rates for offices remain below those of the retail and hotel sectors, according to a Morningstar review earlier this week of loans tied to commercial mortgage bonds. That’s partly because the impact of falling valuations and lower office occupancy takes time to work its way through the system. 

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One early indicator of what may be coming: of the office loans inside CMBS that matured during the first quarter, only 71 per cent paid at maturity, down sharply from the 95 per cent and 85 per cent, respectively, reported for 2021 and 2022 maturities, according to a note this week by strategists at Barclays. 

If and when distress rises and banks or other lenders begin looking for buyers, private credit is likely to be standing by, said Stav Gaon, head of securitised products research at Academy Securities. They possess the capital as well as the sophistication to spot value in a part of the commercial market that’s widely spurned. 

“Sophisticated real estate and private equity investors are well positioned to sift through the commercial real estate universe to identify the attractive opportunities – the office buildings that could be redeveloped, the conversion candidates, the lost causes to avoid,” said Gaon. BLOOMBERG