Rising interest rates and the shift to hybrid and remote work models have significantly impacted commercial real estate as an investment. As commercial tenants downsize or reconfigure their office footprints in response to the need for less physical space, the income streams from office leases are decreasing as well. Meanwhile, property owners are facing rising costs from inflation, including higher costs for maintenance, taxes, labor and utilities, not to mention any floating-rate debt.
This environment of reduced income and increased costs is putting pressure on property owners to refinance their collateralized mortgage loans (CML). However, bank lenders are facing pressures and challenges of their own, and many do not view refinancing as an attractive option right now. Instead, they are looking to improve balance sheets by increasing liquidity, yields and deposits. One result is that banks are selling CMLs for pennies on the dollar.
This all presents an interesting opportunity for private lenders and insurers. A private lender can take advantage of buying up cheap debt to optimize the use of surplus cash and further diversify investment portfolios. A private lender’s purchase of CMLs directly from a bank also benefits the bank -- providing them with much-needed liquidity. The private lender can then expand further on the opportunity by refinancing the CMLs on distressed real estate assets at a discount, achieving an even higher effective yield.
The opportunity is substantial and ripe with potential: $1.5T in CRE loans will need to be refinanced in the next 3 years.[1] In order to take on these CMLs, however, private lenders and insurers need technology and infrastructure designed to properly handle commercial loans. They need advanced risk tools and analytics to manage credit default risk, cash flow forecasting, interest rate risk and what-if scenarios. Success will also hinge on the ability to identify, evaluate and price distressed lending opportunities, and the operational expertise to understand commercial loan origination, accounting, operations and administrative requirements. This expertise can be achieved through internal staff or an outsourcing partner.
SS&C can help private lenders and insurers navigate the challenges of real estate investments and position themselves to take advantage of this unique investment opportunity in the market. Partnering with SS&C will give you access to all of the technology, services and expertise you need to incorporate private debt into your portfolio strategy. To learn more contact us.
[1] Bloomberg, “A $1.5T Wall of Debt is Looming for US Commercial Properties,” April 8, 2023, by Neil Callanan
