North America’s credit market gets real

The US offers stable loan underwriting standards and an opportunity for debt funds to take back market share from banks, which have lent more in recent quarters. By Andrew Hedlund

As real estate debt has grown, North America has been the biggest beneficiary of the trend.

Fundraising for the strategy by region – where a firm plans to deploy capital rather than where the vehicle’s investors are – has fluctuated over the past four years, but one constant has been the rise of North America, according to PDI data.

The region accounted for slightly more than one-in-five dollars raised in real estate in 2014. By 2017, that figure had risen to nearly one-in-two and represented a plurality of the total capital raised in the sector. Fundraising across other regions has fluctuated, typically posting a strong year followed by a muted year.

Though North America-focused funds collected only 30 percent of the worldwide capital through the first six months of the year, a substantial amount – some $23.24 billion – is being sought for real estate debt that will invest mainly in the region. Some of the largest vehicles include Almanac Realty Securities VIII, Bridge Debt Strategies Fund III and Kayne Anderson Real Estate Debt III, which is seeking $1.5 billion.

In November, Brookfield Asset Management closed its mammoth $3 billion Brookfield Real Estate Finance Fund  V – a vehicle that will be focused on the US.

Opportunities within the region come in part from the risk retention rules for commercial mortgage-backed securities, according to an investor presentation circulated with the Brookfield fund. Further giving North American real estate debt managers reason to be optimistic is a recent CBRE study that named New York and Los Angeles as two of the three largest real estate markets in the world.

The debt capital raised presents an opportunity to add more firepower to the US lending market.

STABLE UNDERWRITING

In the second quarter, banks more than doubled their market share of US commercial real estate loan closings, according to data from CBRE. The “other” category – which includes real estate investment trusts, finance companies and debt funds – fell to 16 percent in the second quarter from 21 percent at the same time last year.

In addition, underwriting has remained relatively stable recently, the Los Angeles-based real estate services and investment firm found. Recent quarters have seen “no substantial deterioration in loan underwriting measures”, the firm noted in its findings for the second quarter.

“The commercial mortgage lending market should remain favourable to borrowers for the balance of the year. Loan credit spreads remain tight and underwriting standards are stable,” says Brian Stoffers, global president of debt and structured finance for capital markets.

This differs notably from the lending conditions in private corporate credit, a space in which underwriting standards have become looser, though this trend has either stabilised or reversed recently.

With all the capital raised – much of which is likely still in its investment period – and all the money being sought, conditions may deteriorate as a result of all the competition, but North America is poised to remain a key market for real estate debt.