New Lionheart, Schroders Agreement Targets Distressed CRE Credit Investments

Lionheart Strategic Management and Schroders Investment Management North America will target $250 million in transitional and distressed real estate credit investments as part of a new loan acquisition agreement. 

The deal with Lionheart, an affiliate of Fisher Brothers that manages capital on behalf of third party investors, will allow Schroders to continue to deploy capital through strategic real estate partnerships. 

The market for distressed deals has been tepid thus far as compared to the last economic downtown. In early 2007, distressed sales accounted for less than one-half percent of all CRE transactions, but by the end of 2010, they were 20% of the total sales market, according to Real Capital Analytics. But today, distressed sales account for a mere one percent of all transactions, according to RCA data.  And with an end to the COVID-19 crisis in sight thanks to multiple vaccine rollouts, it could be that potential distressed debt buyers have missed their chance.

Yet some groups expect that distress will mount over time, as it did in the Great Recession. CoStar predicts a large number of distressed sales to hit in the middle of 2021 and posits they’ll surpass the number of those deals in the last economic downturn. CoStar’s models predict a range of between $96 billion and $370 billion.

Default rates on CMBS loans have reached Great Recession levels due to the ongoing COVID-19 pandemic, creating a need for capital to provide liquidity in the market. The default rate for fixed-rate CMBS is nearing the prior peak of 16.8% recorded in 2013, according to Fitch Ratings, and Fitch is predicting that cumulative defaults will reach 19% by the end of 2021. The Trepp CMBS Special Servicing Rate also dropped 35 basis points in December.

 In addition, Lionheart predicts that nearly $700 billion in construction loans originated in 2018 and 2019 will fall out of balance due to supply chain and labor issues, presenting opportunities for rescue capital.

“We’re seeing incredible opportunities in the market as a result of the pandemic and its impacts on commercial real estate markets,” said Winston Fisher, chairman of Lionheart Strategic Management in prepared remarks. ”Now more than ever the need for a capable capital partner is paramount and we are well-positioned in that regard. Our value-add as a lender is providing senior lenders with comfort knowing that the mezzanine position is backed by a full-service real estate firm that can provide operational knowledge to complex construction projects.”