Commercial real estate is in the eye of the storm for most market agents. And no wonder. Many entities, both regional banks and fund managers, buy assets linked to the ‘real estate’ of this segment that have now suffered a depreciation of between 30% and 60%, in the worst case scenario. It is the credit area that most worries Wall Street. However, there are entities that, faced with this disastrous aspect of American commercial real estate, want to fish in this troubled river. This is the case of JP Morgan.
“Despite doomsday headlines, supply and demand fundamentals and leverage levels appear strong across most commercial real estate sectors,” he notes in a recent report. For the bank, this is no secret: “The most aggressive cycle of Federal Reserve (Fed) rate hikes in the last 40 years has raised the cost of capital and reduced real estate valuations, especially for homeowners who “They have to face a higher cost of debt.”
However, as Corporate Real Estate (CRE) owners regroup in a more difficult business environment, investors anticipate promising opportunities in these stressed markets, if you know where to look. As context within the US CRE sector, some key sectors are grouped together: office, hospitality, retail, industrial (including data centers) and residential.
Rising rates mean CRE investors and developers, accustomed to borrowing at low single-digit rates, must adjust to much higher interest payments, according to JP Morgan. “In addition, loans are more difficult to obtain. Linkages between lenders in the interconnected CRE sector have accelerated contagion effects as credit conditions tighten,” these analysts comment.
The US regional banking crisis earlier this year inevitably compounded the problem, given that small and regional banks account for 26% of lending in this segment. The question is: How much damage could commercial real estate do to the overall U.S. economy? For the North American bank, it should “be limited.” Tensions in the commercial real estate market are not seen as triggering a broader recession.
“In the Environment, Investors Willing to Provide ‘Rescue Capital’ to Distressed Homeowners to Paeden Borrowers’ Conditions and a Potentially Attractive Return on Their Investments, Says JP Morgan, Pointing to Big Opportunity There Could Be Right Now .
They justify it with some important factors. Many outstanding loans will mature over the next three years, which they think could provide a good entry point for investors. “Although we generally stay away from the problematic office sector, we find interesting prospects in the residential, hotel and industrial sectors of the commercial real estate industry,” they elaborate.
What could this mean for the investor? As JP Morgan indicates throughout the report, it depends on the objectives of individuals and investment options: “The commercial real estate market can offer the possibility of obtaining income, capital appreciation, protection from inflation and diversification of the portfolio.”
And in the meantime, the American commercial real estate market continues to offer a wide range of opportunities, in his view. “As we have already mentioned, we are avoiding the office sector, at least for now, but we find interesting prospects, and already attractive valuations, in the retail, hospitality, industrial and residential sectors (multifamily, senior housing, student residences)”, they say .
Across the interconnected network of the CRE sector, they see potential for compelling risk-adjusted returns in both equity and debt markets, focusing on a few key access points. One of them would be to acquire cre loans from bank balances. “As pressure on bank lending increases, more banks may sell loans to shore up their balances,” they say.
Also take advantage of the volatility of the securitized CRE debt markets: “If spreads widen substantially in the markets for securitized CRE debt (CMBS or collateralized loan obligations), investors with experience in the properties underlying those securities may be able to take advantage”. And finally, acquire loans with a purchase option: “Investors with experience in restructuring assets can acquire non-performing debt at a discount to direct a restructuring and thus become owners of a property with a greatly reduced valuation.”
As a final point, it should be noted that the consensus sees commercial real estate as the sector in which we should not be invested at this time. Unlike JP Morgan, Wall Street analysts have enormous risks within this space for the expected profitability that can be achieved. JP Morgan sees that this analysis may be wrong.
