Credit Funds Eye a CRE Distressed Market

Commercial real estate financing faces some intense pressure, and it looks like private credit funds are taking notice for potential profit.

In the May 2023 Financial Stability Report, the Federal Reserve noted that since the Global Financial Crisis, “private credit funds have experienced substantial growth, as the privately negotiated loans that they extend have become an increasingly important source of credit for some businesses, particularly middle-market companies.” The latter are businesses in roughly the $10 million to $1 billion range, an area where a lot of CRE businesses play. “As of 2021:Q4, their assets under management (AUM) stood at $1 trillion, and the estimated ‘dry powder’ (committed but uncalled capital) amounted to $228 billion.”

With large CRE debt maturities coming to maturity in the next couple of years in an atmosphere of tighter credit requirements, higher interest rates, and lower forward-going available leverage, many properties will need help.

According to CRED iQ, April 2023 CMBS transactions saw about $94 million in realized losses from distressed assets workouts. “CRED iQ identified 15 workouts classified as dispositions, liquidations, or discounted payoffs in April 2023. Of the 15 workouts, four were resolved without a principal loss,” the firm wrote. “Of the 11 workouts resulting in losses, severities for the month of April ranged from 1.5% to 71%, based on outstanding balances at disposition.”

“The volume commercial real estate debt maturing in 2023 ranges between $400 billion as estimated by MSCI, and the Mortgage Bankers Association’s estimate of $728 billion,” wrote Marcus & Millichap last month. “During a time of elevated capital costs and fewer active lenders, apprehension has mounted around borrowers’ ability to refinance assets and the associated risk of loan defaults.”

Private credit funds look to be a source of aid, especially as the collapse of multiple banks in the last few months will leave traditional lenders wary of participating too much and scaring off deposits, which could lead to liquidity issues and potential loss of solvency.

Bain Capital is looking to raise $4 billion for a new global special situations fund, according to a Reuters report based on unnamed sources. Bain Capital declined to comment about such a fund and a reported $2 billion already raised, Reuters said.

In 2020, Bain Capital said that it had raised $3.2 billion for a distressed fund.

“As part of the strategy, Bain Capital has adopted more flexibility on deploying capital and is investing in asset classes including equity, distressed assets, loan portfolios, corporate investments, and real estate,” said Reuters.

In April, Fundrise wrote, “Continued stability across the portfolio positions us to take advantage of opportunities that we expect to arise over the coming months as a result of further distress in financial markets.”

And Bloomberg recently reported that Fundrise looks to raise $500 million in a credit fund specifically to address increased distress in U.S. CRE.