Can These Recent Private Equity Deals Actually Save Commercial Real Estate?

It’s become trite, even if accurate, to repeat the Warren Buffett quote that it’s only after the tide goes out that you see who’s been swimming au naturel.

With banks feeling pain (and some going out of business), lending tighter than ever, and commercial real estate owners and investors facing coming waves of painful refinancing at rates they may not be able to afford, there’s been an assumption that private equity could save the day.

Blackstone has been in talks with large regional banks in the U.S. about providing capital for lending, according to the Financial Times. According to company president Jon Gray, the mechanism would work by a bank originating loans and Blackstone moving to its insurance customers, for which it does asset management. The customers would pay a fee to Blackstone.

“Rather than putting all [of the risk] on its balance sheet, maybe they keep 50 cents [on the dollar], and put 50 cents with us,” Gray told the FT.

In an early May 2023 earnings call, Marc Rowan, CEO of Apollo, said that “de-banking has already been happening across our country” and that they estimate banks to be less than 20% of debt capital. “Given what’s happened in regional banking, I expect that to become more of an investor marketplace,” he said.

There is a lot of private equity capital in theory available for deals with banks and even for direct CRE lending. But to take a much older saying, who will guard the guards themselves/? Changed for current times just a bit, which of the rescuers might end up needing the cavalry?

Howard Marks, co-founder of investment group Oaktree Capital Management, told the Financial Times in a separate piece that private credit has taken off at a scale and pace has yet to be tested, so there is no way to know yet how prudent or savvy deals have been. Big asset managers looking to grab business lent aggressively to private equity groups.

“The tide has not gone out yet on private lending, meaning the portfolios haven’t been tested,” Marks said. “Did the managers make good credit decisions, ensuring an adequate margin of safety, or did they invest fast because they could accumulate more capital? We’ll see.”

From the fall of 2022 to the beginning of 2023, some sources were suggesting to GlobeSt.com that massive amounts of capital began to form, often pushed into funds that had never done much in commercial real estate before. Prices went up, cap rates dropped, and many of these funds weren’t prepared for the reversals that rising interest rates could cause.

As Moody’s Investor Service noted and Investment Executive reported, a recent report said private equity “will be tested further in 2023 as already tight financial conditions tighten further, alongside the rising risks of spillovers from banking stress and an anticipated economic downturn” and that the sector “could harbor risks that are not currently visible.”

Which brings to mind a third old saying: “We shall see.”