Mind the (Funding) Gap: Finding Opportunities in Real Estate Debt Amid Dislocation

Higher interest rates have pressured real estate prices, but fundamentals remain stable across most property types. In this white paper and on-demand class, we examine the state of the real estate market and discuss the opportunity in RE debt in light of wider spreads, more lender-friendly terms, and significant refinancing needs.

Key Takeaways

  • Higher interest rates have pressured real estate prices, but fundamentals remain stable for most property types. Coupled with rising base rates and spreads, lower lender leverage, and heightened ability to drive terms in a constrained funding market, we believe that real estate debt presents an attractive opportunity in the current market environment. And we see this potential opportunity augmented by significant amounts of maturing loans and funding gaps.   
  • Specifically, certain challenged office is indeed a part of CRE that is in distress due to structural changes in the way office space is used following the Covid-19 pandemic. But, apart from office, sectors such as industrial, multifamily, and others are showing resilient fundamentals. Additionally, secular trends continue to carry on for some traditional and specialized sectors. In other words, it is key, in our view, to not equate CRE as a whole to what’s happening specifically in the office space.
  • CRE is a highly diverse asset class, comprised of other traditional sectors such as multifamily, industrial, retail, and hotels. It also includes sub-sectors (e.g., student housing, cold storage, self storage, and data centers) that arise from traditional sectors due to changes in needs, advances in technology, changing consumer behavior, and other trends. Each type of property has its own use cases, characteristics, trends, and demand drivers that can offer opportunities for growth.
  • There is a large need for capital on the horizon as significant amounts of real estate loans are expected to mature over the next few years. And funding gaps from declining property values and stricter loan standards need to be closed, offering another area to provide capital. We believe that real estate debt presents an attractive opportunity in the current market environment due to the potential for higher yields and lower leverage levels on reset valuations, providing more protective loan structures. We see the opportunity to originate real estate debt attractive in both the US and Europe.
  • The opportunity is augmented for private capital providers, given some traditional funding sources—such as banks and the securitization market—have retrenched, leaving a void for other lenders to fill.

The information herein is provided for educational purposes only and should not be construed as financial or investment advice, nor should any information in this document be relied on when making an investment decision. Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change. Please see the end of this document for important disclosure information.

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