RXR’s Scott Rechler Shares His Investment Strategy Amid CRE Dislocation
In an exclusive 'Power Briefing' with CO’s Cathy Cunningham, the RXR chairman discussed how he’s taking advantage of the new normal
By Brian Pascus September 9, 2024 5:16 pm
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Expect interest rates to remain elevated, prepare for banks to lend to non-banks rather than borrowers, and don’t get bogged down by fears because we’re living through “a generational” investment opportunity of commercial real estate dislocation.
These are the conclusions from Scott Rechler, the chairman and CEO of RXR, who sat down with Commercial Observer Executive Editor Cathy Cunningham on Monday during a “Power Briefing” on debt and equity trends emerging in a recovering market.
“The storm still has to come to shore, and it still has to be dealt with in terms of balance sheets and capital structures that need to be re-equitized and restructured,” said Rechler. “It’s not survive until 2025. It’s survive through 2025, the fix will begin in 2026, and, if all goes well, it’s heaven in 2027.”
Rechler emphasized in his opening remarks that capital markets are at an important inflection point of depressed values, upside down capital stacks, and fluctuating interest rates. It’s a situation that crafty investors can take advantage of, just so long as they don’t get bogged down by their fears.
“The largest opportunity cost in times like this is the cost of getting hung up on dealing with challenges and not capitalizing on opportunities this moment has presented,” he said. “You need to focus on where you are uniquely situated in what’s going to be a generational investment moment.”
Despite recent indications from Federal Reserve Chairman Jerome Powell that interest rates could be cut in the near future, Rechler cautioned against expecting “lower” rates as we had in the past.
“The new normal is higher rates. I don’t think the lower rates we experienced over the last decade-plus of 0 percent to 2 percent will be the new normal going forward. It will be in the 2 percent to 4 percent range,” he said. “And we will need to adjust our capital structures to address that, and that’s part of this multistage process that has to happen.”
To prepare for a world of higher rates and all the opportunities that come with that for lenders, borrowers, and investors, Rechler and his team at RXR recently announced plans to inaugurate RXR Credit Solutions, a private capital vehicle to deploy mezzanine debt and preferred equity into underwater CRE projects across asset classes and markets.
The new RXR vehicle specializes in gap financing deals between $10 million and $50 million, but has injected as much as $200 million into a single project, according to Rechler, who added the firm has done $1 billion of credit and equity into projects this year and expects upwards of $3 billion next year.
“We’re trying to position ourselves between a lender and a partner, as we’re not looking to be a pure lender,” he said. “We want to be able to help the borrower execute their business strategy in any way we can.”
To this end, RXR is targeting both multifamily and office as the two asset classes where their loans or rescue capital can find the best returns. Rechler noted that the nation’s housing sector has been impacted by higher interest rates even as the multifamily sector has experienced record-level deliveries since 2023. But as supply drops off a cliff in 2025 and 2026, multifamily projects that are getting off the ground today will be primed for lucrative returns, he noted.
“There’s a little bit of a bubble for great investment opportunities for longer-term investors, but in 2026 it will reverse itself and we’ll have more demand than supply because of the tightness of the construction market today,” explained Rechler. “[Multifamily] is the area that’s overarchingly the greatest place to invest into short-term headwinds that will reverse into significant tailwinds on the other side, in terms of fundamentals,” he said.
He added that office investment is a much more targeted and contrarian play that seeks higher returns, and one that currently lacks traditional financing sources that are participating in that re-equitization.
“That’s why the dislocation opens up an even greater opportunity [in office],” he said. “But you really need to be people who understand the nuances of each building and each market, and are able to navigate not only the capital, but have the capabilities to execute those plans.”
In what might be his most prescient assessment of the system, Rechler described the continued evolution of capital markets, as commercial banks now lend directly to non-bank lenders like RXR rather than traditional borrowers.
He described how larger commercial banks now lend to RXR Credit Solutions, which in turn provides the senior loan into a deal, or regional banks that originate a loan (mainly because they prefer to maintain relationships with customers) now sell it off to a debt fund like RXR Credit Solutions and others. Rechler compared the recent behavior to create more liquidity as similar to the emergence of the commercial mortgage-backed securities market in the 1990s, and the growth of real estate private equity after the 2008 Global Financial Crisis.
“I think it’s healthy. You’re not putting depositor capital at risk, it’s for long duration [loans], and you’re bringing in real estate expertise to the table,” he said. “That non-bank lender will probably be more of the new, permanent norm.”
Brian Pascus can be reached at bpascus@commercialobserver.com
