Real estate lending is providing attractive opportunities amid heightened capital consolidation in traditional markets
by Andrew Fentress, Managing Partner, and Mark Fogel, President & CEO, ACRES Capital
What new drivers of value are emerging in real estate?
There are some good things happening in the real estate landscape related to innovation, creativity, and equity formation – particularly in some of the more developed markets like the US, but also in Eastern Europe and the UK. There's been a lot of retail disruption as a result of the ‘Amazon effect’ in the US: new equity capital is being formed to redevelop and repurpose assets that once served the retail community, which is an encouraging and productive use of equity capital. There are also new concepts around co-living and co-working: taking existing capacity and repurposing it. We believe these are encouraging trends.
Are you seeing a higher level of capital consolidation as the end of the market cycle approaches?
There does seem to be consolidation occurring mostly in private capital. We’ve seen examples of private funds buying publicly traded REITs, where the public is valuing assets inside the structure at a discount. Some of the large brand names in the space, like Prologis and Blackstone, can acquire industrial assets that are in public REITs at a discount through a take-private transaction. If there is a hiccup in the marketplace, we would expect to see some consolidation whereby portfolios controlled by smaller managers would be acquired by bigger players.
On the debt side, we haven't seen consolidation in our space. The competition we face comes from a very highly fragmented marketplace, which provides the opportunity to do what we do well and earn the rates of return that are available to us in today’s market.
How are you adapting your investment strategy to tackle high valuations?
We look at it on an asset-by-asset basis, and don't get caught up in where the market is turning. A lot of people right now are turning toward multi-family assets, which is driving values to higher levels. We source alternative solutions such as adaptive re-use situations, where we are buying in at the lower end of the spectrum, so our basis in the asset is very low from a debt perspective. This results in ACRES financing in a Class A asset where we are very comfortable with our loan basis, as opposed to cash flow lending on high valuations on Class C or D multi-family properties where there's nowhere to go but down.
This article is taken from the 2020 Preqin Global Real Estate Report. For more expert commentary on the real estate industry, please visit: preqin.com/grer
ACRES is a balance-sheet lender and SEC-registered investment adviser that provides debt capital solutions for the commercial real estate industry on a nationwide platform. ACRES seeks opportunities in the $10-75mn range on stabilized and transitional properties including multifamily, retail, office, hospitality and industrial. The firm delivers creative and flexible financing solutions in all phases for acquisition, value-add, refinancing and construction projects. As of November 2019, ACRES has closed over $1.25bn of transactions.