Goldman and Fortress Look to the Wealthy for Debt REITs

There’s a new REIT type on the block. Big firms are forming organizations to deliver financing to commercial property debt, as Bloomberg reported. Fortress Investment Group, Goldman Sachs, and Principal Financial Group among others are forming non-traded REITs. Goldman hopes to raise up to $1 billion, according to an SEC filing.

The institutions are marketing these new structures to high-net-worth accredited investors who want to get exposure to CRE debt. They can periodically cash in shares at net-asset value, adding a form of semi-liquidity to make the venture more attractive.

According to a Mortgage Brokers of America projection, commercial and multifamily mortgage borrowing and lending should finish 2024 at $539 billion, up 26% from 2023.

As the Federal Reserve cut 50 basis points from the benchmark federal funds rate — down to a range from 4.75% to 5.00% — it was already exciting for many in CRE. After years of waiting for rates to drop, there were hopes for increased transactions and price discovery. However, a cold bucket of realism remains. A drop of 50 basis points isn’t that large and will take time to percolate through the financial networks.

Many borrowers will need to refinance loans taken out before and into the early parts of the pandemic and 25 to 50 basis points off the federal funds rate won’t necessarily translate into a matching markdown. Lenders might keep a larger spread, remembering how they weren’t prepared for changes because of unexpected inflation. Even if they didn’t, banks that had typically offered the lowest rates have still yet to expand their CRE lending activity.

It’s why private lending into the CRE space has become increasingly popular. There’s money to be made from those who need to refinance or get a bridge loan for a project but who don’t qualify for banks or other alternative financing approaches.

Typically, one might expect bigger institutional investors to push into this market. There are four reasons why the REIT creators might have taken this path. One would be the expectation that the need for financing alternatives will only increase. The new REIT structure would give them access to a new source of capital to meet greater demand.

There is another possibility. Many investors say they’re on the sidelines until 2025. A recent sentiment survey from Matthews Real Estate Investment Services says that 55% of them saw the value of the real estate on average remain the same for the first half of the year. Another 46% said their rents have remained the same. About 30% reported values as lower and 2% said values were much lower over the first half. Another 30% said their rents are higher and 2% said rents are much higher, according to the report. Half of the investors described their CRE investments as average. If many traditional investors hold off for now, the institutions creating the structures might be short the additional capital they want.

A third could be a matter of trying to speed up response to an opportunity that might only last for two to three years. And the fourth? Maybe it’s just following previous patterns where the big institutions look to expand their profitability. Or it could be some combination.

One certainty is the market will see more of these REITs coming up.