We are already seeing a hint of what is to come in our real estate credit and equity pipelines, where activity is picking up. There are currently some $15 billion of loans in our real estate credit pipeline, which is up from $10-12 billion on average in 2023, and we are bringing multiple deals to our equity investment committee each week. We expect there will be significant opportunities to lend as both refinancings and acquisitions increase.
The Ongoing Need for Private Debt Capital
In 2023, U.S. government agencies, insurance companies and select private debt funds were able to provide most of the financing the market needed. That may not be possible as transaction volumes pick up, particularly because we do not expect banks to revert to their previous lending activity. After last year’s regional bank failures and decline in property values, banks’ liquidity and commercial real estate portfolios, specifically their office exposure, are under heavy scrutiny. New York Community Bancorp’s decision in February 2024 to slash its dividend stemmed from stricter capital standards after absorbing parts of Signature Bank, but it resurfaced concerns about the exposure U.S. banks have to commercial real estate.
Doing some back-of-the-envelope math, if bank lending recedes to 40% of the roughly $5.8 trillion commercial real estate debt market from 50%, it leaves a gap of over $500 billion. Who will be able to fill that gap? We do not think insurance companies or U.S. government agencies can allocate significantly more to commercial real estate given their existing exposure. That leaves CMBS and debt funds.
We expect a meaningful increase in CMBS issuance over the next several years, including $62 billion this year, up from $47 billion in 2023. We are already seeing signs of thawing in this market (Exhibit 5A). As for private debt funds, they are sitting on $39 billion in dry powder (Exhibit 5B). These are large numbers, but taken together, current non-bank financing remains insufficient to fill the void left behind by the pullback from banks.
EXHIBIT 5A: CMBS Issuance ($B)
