The pandemic forced hotel, shopping malls, 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 interruption, 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 arising from the pandemic.
"People who have been sitting on the sidelines, so to speak, are very excited to jump in," said Catherine Liu, a research fellow at Trepp, a company that tracks data on commercial real estate.
If anything, despite signs that the pandemic is getting under control with vaccine rollouts, 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 obligations, contain dozens of real estate loans.
Secured loan commitments of approximately $ 4 billion had been issued by 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 out of Philadelphia, capitalized on investor appetite for secured loan commitments. Around $ 45 million was raised last month to renovate the Promenade on the Peninsula, an open-air shopping mall near Long Beach, California, according to Bloomberg data.
The mall was roughly 20 percent empty, and the two largest tenants, Regal Cinemas and Equinox Fitness, ceased operations and rent due last month, according to a report by Moody & # 39; s Investors Service, which assessed its financial condition set by Covid-19 security. According to Moody & # 39; s, since receiving the loan, the mall's owners had spent around $ 8 million converting some parts of the property into office space and renovating lobbies and retail suites to make the property more competitive.
Investors like Eric Kirsch, the global chief investment officer at insurance company Aflac, see a more direct way to invest in commercial real estate, especially projects that typically require short-term funding 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 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 take out loans directly from a partnership in which Aflacs investment management branch Aflac Global Investments invests. 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.
Feb. 25, 2021, 7:19 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 bounce back. This is a great 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 seen as much recovery as the corporate loan market." He added, "If you look at other things we could invest in, it is extremely attractive in relative terms."
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.
However, 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 closed 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, New York-based company bought the building in 2019 in a joint venture with other developers, including Goldman Sachs' Urban Investment Group. The plan is to overhaul rooftop lobbies and amenities, reposition the walls, and improve the heating 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.
"When 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.