Commercial Real Estate Financiers Pivot Plenty in Changing Debt Markets

For fans of the 1990s sitcom “Friends,” the  the word “pivot” will forever be associated with Ross, Rachel and Chandler’s fruitless attempt to move a couch up a winding stairwell. The phrase has taken on a far different and important meaning for commercial real estate financiers over the past couple of years as they contend with rapidly changing credit conditions amid higher interest rates.

The lenders and debt brokers who stood out are the ones with the ability to adjust strategies based on where the markets are headed, whether it be property sectors or loan structure. 

Starwood Property Trust has proactively pivoted since the COVID-19 pandemic dislocated the office sector as a number of companies adopted remote work policies. Starwood reduced its office exposure and future funding for the asset class by 50 percent.

“Those moves have allowed us to maintain liquidity and invest every quarter while our peers have been quiet,” said Jeff DiModica, president of Starwood Property Trust. 

Deutsche Bank (DB) shifted amid elevated interest rates by offering the first five-year commercial mortgage-backed securities conduit transaction in early 2023 in response to borrowers seeking shorter duration periods. Dino Paparelli, global head of CRE at Deutsche Bank, said the five-year term was a “unique solution” to address higher borrowing costs and underscores the importance of adapting in a volatile market.

“The opportunities when you step up to support the client in the difficult days is where you really show your market presence,” Paparelli said. 

Morgan Stanley (MS) has shown an ability to adapt to market conditions the past two years, first shifting to balance sheet transactions in 2022 as the commercial mortgage-backed securities markets dried up before pivoting back to a heavy CMBS focus last year. Morgan Stanley’s 2023 lending volume of $5.4 billion consisted of 77 percent from securitizations. 

Newmark (NMRK) in particular has made pivoting to various asset classes a trademark of the brokerage giant with its philosophy of skating to where the puck is going. It was aggressive last year with infrastructure-oriented investments in the industrial sector and hired Brent Mayo from investment bank DH Capital last August to lead a new capital markets business focused on data center deals. 

“Like past years, we skated to the puck and were very early on data center transactions that help buoy volume numbers,” said Jordan Roeschlaub, Newmark’s co-head of global debt and structured finance. “Consistent with historical precedent, we focused on finding the arb in the markets.”