Big CRE Players Take Aim At the Coming Distress

One of the speculations GlobeSt.com has heard since the Federal Reserve started the interest rate climb to head off inflation has been when the distress would happen.

Too many properties had been purchased under low interest rates and high leverage. When the inevitable time case to refinance, the current rates would make that process too costly, especially as lenders were tightening underwriting. Either owners would have to put in significant amounts of extra equity, they’d have to sell under distressed conditions, or they’d be required to turn the property in to the lender.

Some recent moves by Brookfield and Blackstone are evidence that the chase for the distressed gravy train may finally be on.

Brookfield Asset Management CEO Bruce Flatt is eyeing the bargains, according to a story by Bloomberg. “The easiest way to make money in real assets, especially in real estate, is to buy great assets with bad capital structures,” he said at Goldman Sachs Group-hosted investor conference. “There will be a number of those situations. “They’re not coming in one day, or there’s not going to be just an event. But they’re just going to be coming in the next 24 to 36 months, and hopefully we can capture some of those.”

With $850 billion in assets under management, that would seem more than just feasible.

And then there is Blackstone, which was at the same Goldman Sachs conference, according to Bloomberg. Blackstone President John Gray disclosed that it had completed a half dozen deals, about $7 billion of value, with banks.

“In a typical deal with banks, an alternative asset manager takes a stake in a pool of loans that could include everything from home improvement to equipment loans,” Bloomberg explained. “The transaction frees up banks’ balance sheets — even if they continue to service the loans and maintain a relationship with borrowers.”

What has helped Blackstone provide rescue capital to financial institutions is the trouble banks have had this year with tumbling prices of bond assets that led to the closing of some high-profile midsized banks.

But not everyone is convinced in the supremacy of private equity. Carson Block and his short-selling firm Muddy Waters has shorted the REIT Blackstone Mortgage Trust, which lends money against commercial real estate collateral.

Ironically, the big money that could profit off distress could feel the heat itself.