Lenders at MIPIM Seek Fresh Opportunities as Search for Yield Drags on
It’s official: there’s nowhere in the world left where you can escape the pressure of the relentless search for yield. Even borrowers and lenders who decamped to Cannes, France for a major real estate conference there this week—Le Marché International des Professionnels de l’Immobilier, or MIPIM—couldn’t avoid hearing about brutal global competition for exposure to U.S. commercial real estate debt.
At Commercial Observer’s U.S. Lenders’ Outlook seminar on Wednesday, panelists dropped the ‘C’ word nearly 20 times during the half-hour discussion, sighing that minuscule returns had driven institutional lenders running from the sectors they’d otherwise be most keen to lend in.
“We’d love to do some multifamily in certain markets, but for us, that’s a yield issue,” said Kristin Khanna, a Barclays CMBS executive. “It’s just tough for us to get the pricing we need because [lending opportunities] are just so in demand.”
As a result, fierce clamoring for debt deals has driven originators to pore ceaselessly over their industry directories, constantly reevaluating sponsors and asset classes they’d written off in the recent past. Case in point? WeWork. Panelists said that the buildings the shared workspace company occupied were once seen as lepers because WeWork tended to attract here-today-gone-tomorrow sub-lessees. Now that that’s shifted a tad, institutions desperate for red meat are back on the scent.
“When WeWork first started, many lenders were uncertain about financing buildings with WeWork as a tenant. Lenders were unsure how to underwrite the value of that space,” Mark Edelstein, chair of the real estate group at Morrison & Foerster and the panel’s moderator, said. “Since then, WeWork has grown by leaps and bounds, and today many lenders seem comfortable financing buildings that might entirely be leased to WeWork.”
A slightly higher proportion of more established businesses among WeWork’s tenant roster has been just the prod that lenders have needed to give WeWork-occupied assets a second chance.
“If you look at what [WeWork’s] tenancy is, 75 percent of who rents their space are companies or individuals 14 people or less, and 25 percent is what they call ‘enterprise,’ ” said David Bouton, who co-leads Citigroup (C)‘s real estate lending business. “So clearly they’ve been diverse, and they’ve been increasing their enterprise constituency.”
The panel’s resident borrower, Blackstone (BX) capital markets chief Michael Lascher, reported that as an equity investor, his firm has found itself in a similar position. Blackstone, too, is seeking niche opportunities as a real estate buyer, rather than trying to squeeze water from stones in better-tread portions of the market.
“We invested a couple years ago in a company called BioMed Realty, a lab-office business that we took private,” Lascher said. “We continue to see really impressive rent growth that doubles the rent growth in typical office space.”
Similarly, when shaping its lodging portfolio, the company has increasingly turned to buying one-of-a-kind luxury resorts in markets with high barriers to entry.
“We’ve bought a lot in Hawaii recently,” Lascher said. “In the U.S., we’ve really looked to irreplaceable resort assets.”
Reporting by Lauren Elkies Schram.