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PE Firms Target Troubled U.S. Commercial Real Estate Amid Market Turmoil

Quiver Editor

Distressed investors see one of the best opportunities in a generation to buy troubled U.S. real estate assets as the commercial property crash continues to roil the market. Private equity firms are already positioning to take advantage. About 64% of the $400 billion of dry powder that the industry has set aside for property investment is targeted at North America, the highest share in two decades, according to data compiled by Preqin. The fear elsewhere is that a strong U.S. bias will mean other parts of the world won’t draw the same demand, delaying the workout of troubled loans and properties there.

PE firms want to take advantage of deep American discounts after office values fell by almost a quarter last year, more than in Europe, following the pandemic work-from-home shift. Almost $1 trillion of debt linked to commercial real estate will mature this year in the U.S., according to the Mortgage Bankers Association, and rising defaults as borrowers fail to repay will create more options for buyers of distressed assets. “Compared with the Savings & Loans crisis and 2008, we’re still in the first or second innings” when it comes to troubled assets, said Rebel Cole, a finance professor at Florida Atlantic University who also advises Oaktree Capital Management. “There’s a tsunami coming and the waters are pulling out from the beach.”

Market Overview:
  • 64% of $400 billion dry powder targeted at North America.
  • Office values in the U.S. fell by almost a quarter last year.
  • Almost $1 trillion of CRE debt to mature this year in the U.S.
Key Points:
  • Deep discounts attract PE firms to U.S. commercial real estate.
  • Rising defaults create opportunities for distressed asset buyers.
  • Global delay in workout of troubled loans due to U.S. focus.
Looking Ahead:
  • Monitoring the maturation of $1 trillion of CRE debt in the U.S.
  • Assessing the impact of U.S. bias on global real estate recovery.
  • Watching for further declines in office values and rising defaults.

John Brady, global head of real estate at Oaktree, is similarly blunt about what’s ahead: “We could be on the precipice of one of the most significant real estate distressed investment cycles of the last 40 years,” he wrote in a recent note on the U.S. “Few asset classes are as unloved as commercial real estate and thus we believe there are few better places to find exceptional bargains.” That focus means other regions could be left with bottom feeders — so-called because of the low offers they typically make — as the main bidders. That risks dragging values in Europe and Asia down further, or leaving some markets stuck in stasis as sellers and lenders refuse to cave to super-lowball bids.

The strong North American economy, deeper markets, and currency strength may contribute to “a delayed market recovery” outside the region, said Omar Eltorai, research director at data provider Altus Group. The opportunity in the U.S. is being driven by lenders pulling away from commercial real estate after borrowing costs rose and values plunged. Asset manager PGIM estimates a gap of almost $150 billion between the volume of loans coming due and new credit availability this year.

About the Author

David Love is an editor at Quiver Quantitative, with a focus on global markets and breaking news. Prior to joining Quiver, David was the CEO of Winter Haven Capital.

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