Invesco’s Bert Crouch On Increasing Investor Appetite for Real Estate Credit

Vehicles such as INCREF are bringing the heady world of private real estate credit to high-net-worth and retail investors at a time when private lenders such as Invesco are benefiting from the ongoing lending void in the market left by the retrenchment of banks, and finding plenty of opportunity to lean in to key opportunities on high-quality assets with top sponsorship. 

The shift in market share from traditional lenders to alternative lenders such as Invesco is something that Bert Crouch, head of North America at Invesco Real Estate (IVZ), doesn’t see ending anytime soon, but it’s only part of Invesco’s broader infrastructure. With $90 billion in assets under management, the investment firm plays up and down the capital stack, across asset types and both domestically and overseas. It brings all of that data and intel — and its firm-wide capabilities — to bear when carving out investment strategies during both up and down markets. 

Crouch, who’s based in Dallas, sat down with Commercial Observer in September to give his take on the state of the market today and why real estate credit is still a hot commodity.

This interview has been edited for length and clarity.  

Commercial Observer: We chatted with your colleague Charlie Rose recently about INCREF and its robust origination volume. What was the impetus behind the REIT’s launch in 2023? 

Bert Crouch: One of the benefits that we have at Invesco Real Estate — and we actually just celebrated our 40th anniversary last year — is we invest across the risk-return spectrum and support opportunistic investments across the capital structure. To your point about your discussion with Charlie Rose, who heads up our global real estate credit initiative, we invest in real estate debt as well. We’ve organically grown to almost $90 billion of assets under management and 21 offices in 16 countries. So, we get a really wide purview of the best risk-adjusted relative value. 

We saw the best opportunity over two and a half years — really since the rate hike cycle started — in real estate credit. Since you last spoke with Charlie, we’ve increased our trailing 12-month origination volumes to north of $2.5 billion across 25 separate loans and facilities. The reason for that is, No. 1, you don’t have to be exactly right when it comes to valuations. You look at who we’re lending to and it’s institutional-quality real estate, it’s well-capitalized sponsors with strong track records, and we’re lending at 65 percent loan to today’s value. Values have adjusted roughly 20 percent peak to trough, and we’re in at around half of peak values as our basis. So, we love that basis. 

Second, if you’re lending at 300 over SOFR [secured overnight finance rate] you’re getting north of an 8 percent unlevered return with moderate leverage. It’s all floating-rate debt, so you benefit from the current rate environment and the dislocation in the capital markets — wider spreads — but you also have an inherent inflation hedge, which is a positive. 

Third, it fits well in a portfolio. I get asked: “Should I be more in equity today? Should I be more in credit today?” Our highest conviction is, we’ve been leaning in to credit for the reasons I mentioned. You’re getting an equity-like return with a credit-like risk profile, you don’t have to deal with the volatility, and it fits very well in a portfolio. 

How are you finding investors’ comfort level in terms of embracing the credit side for a change? Have you seen similar pivots in past cycles, or is this unusual behavior? 

I think this is unusual, but investors are embracing the environment. The reason for that is you’re getting a best of both worlds scenario in real estate credit. What historically has happened when there’s a dislocation is there’s some sort of crisis, and the Federal Reserve is forced to come in and cut rates significantly — if not to zero. So, a dislocation might cause wide credit spreads, but the base rate is going to be very, very low and it’s more difficult to manufacture the elevated total returns. 

In today’s environment, it’s unusual in that you had a pandemic-caused stimulus, the stimulus caused inflation, and the Fed combatted that with over 500 basis points of rate increases over 15 months, which was unprecedented. That drove a dislocation in the banking market, starting with Silicon Valley Bank and, to an extent, ending with New York Community Bank. 

That shone a spotlight on banks’ exposure to real estate, and most notably the regional banks. On top of that, you had Basel III [international regulations on banks developed after the 2008 Global Financial Crisis], so there was a wider pullback in lending, and spreads widened. So to my “best of both worlds” comment, you have high base rates and wide spreads, which is historically unusual. Banks don’t want to add exposure to commercial real estate today, they want to lessen it, but at the same time, their deposits are expensive so they need to be lending somehow. 

So, what is the most capital-efficient way to do that? Doing loan-on-loan lending to non-bank lenders or alternative lenders like us. They’ve given us more access to capital at cheaper financing rates to do just that, and it has created a scenario that is extremely unusual with widespread high base rates, but cheap financing for us, and that’s created excess return for this profile of investment, which has then attracted more sophisticated investors. 

My last comment here would just be on overall market share. If you look at non-bank lenders historically, or just maybe look at the whole $5.7 trillion commercial mortgage universe, banks have been about half of that. Leading up to the current dislocation, banks, especially the regional banks took excess market share, and between that and life insurance companies and commercial mortgage-backed securities, the market share for non-bank lenders was materially smaller, somewhere between 8 and 15 percent. If you fast-forward to today, per CBRE, non-bank originations are up 71 percent and market share was about a third in the second quarter of this year, which actually eclipsed banks at 30 percent. 

So, the acceptance of non-bank, alternative lenders like Invesco Real Estate has really changed to the positive, and that’s creating a reciprocal  borrower relationship that didn’t exist at scale previously. 

Do you see that trend continuing, in terms of the private lenders having the bulk of market share going forward?

Having the bulk of the market share will ebb and flow over time, but to have a significantly higher market share than in the past? I absolutely do. Again, banks will continue to lend in the space, but at a lower level than they have done in the past. 

I alluded to Basel III earlier. There’s still some debate on exactly how that’s going to be introduced and what it’ll ultimately look like, but I can tell you that as it sits today, with regional banks being especially overweight to commercial real estate and having to increase their loan loss reserves and the Basel III endgame coming, there is a sensitivity to increasing market share. That creates an opportunity for those of us that are in the space that have the size, scale, depth, breadth, team capabilities and historical relationships on the borrower side to not only keep our scale, but increase it over time. 

Historically, Invesco has pursued widely coveted asset classes like multifamily and industrial. Is that still the case, and are you seeing any appetizing pockets of opportunity in other asset classes pop up today?

We’ve absolutely leaned into multifamily and into industrial, and we’ll continue to do so. As far as other sectors where we’re seeing opportunity, IOS [industrial outdoor storage] and self-storage are two areas that we’ve recently been lending. We’re starting to see IOS become more of an accepted asset class, a subtype of traditional industrial, and then self-storage tends to rebound as the housing market does. So, we’re getting out ahead of that and seeing some attractive opportunities to lend in that space at an attractive basis as fundamentals start to improve. 

We’ve also started lending more in Europe, as that’s an area where we’re seeing some inefficiencies in the broader capital markets. We have eight offices across Europe and an established presence, so we have a good foothold already. To the extent that that dislocation were to continue, you’ll see us continue to lend there as well.

We’re in for the long haul, and that’s how we will continue to build and ramp our European business. What we just want to do is make sure that we’re leaning into the best relative value, and we’ve seen that recently in Europe, and would expect that to continue. So we’re hopeful about just continuing to build out that team and the originations around it across Western Europe as the opportunity holds. 

You joined Invesco in 2009 in the midst of the GFC. How has this go-around been for you, in terms of all the dislocation that came from COVID, and then the rising interest rate environment? 

It’s been a wild ride. I feel like we’ve seen multiple cycles in an extremely short period of time. With COVID, you had a global health scare causing a response with excess stimulus like we’ve never seen before, to then what we thought was transitory inflation becoming sticky inflation, then significant rate increases and the resulting dislocation kicked off by Silicon Valley Bank. So, it has just been a wild ride. 

You can just look at the REIT market to see it. In October 2022, public REITs were trading at a 27 percent discount to NAV [net asset value]. They were up to basically trading at NAV by February. In April this year they were trading at an 8 percent discount and now they’re at a 10 percent premium. So just the volatility we’ve seen in the public markets, in the rate markets, has admittedly been a little bit exhausting at times. But, again, one of the benefits that firms like ours have is a time-tested process that’s based on proprietary data and strategic analytics and the ability to play globally across the public, private, risk-return spectrum and across the cap structure. We can evolve, and we can do it quickly to take advantage of what’s happening in the market.

What’s different is historically about half of public REITs’ market cap is traditional asset classes, the big four [office, retail, industrial and multifamily], and the residual is nontraditional asset classes. That has really changed of late, in part due to fundamentals changing post-COVID and sectors becoming more institutionally accepted. So, if you look now, nontraditional property types are around 15 percent of NPI [the National Council of Real Estate Investment Property Index] and the index itself expanded to recognize all of these different sectors. So we went from basically five of the major asset classes — the big four plus hotels — to now eight, and, if you look at total subsectors, we’re approaching 30. They’re not only more widely accepted, but you can track them. You can show that if you’re leaning into, let’s say, single-family rental or build-to-rent or self-storage or student housing or senior living, you can now play the residential sector in ways that,historically, you were only really playing traditional apartments or traditional multifamily. So that has been a sea change. 

And, when you compound that by the acceptance and scalability of non-bank lending, of private credit origination, it has changed the game to an extent. It’s allowed us a lot more flexibility in where we invest and how. 

Lastly, the vertical integration that Invesco Real Estate pursues is differentiated, and in certain instances it has necessitated investments in operating companies and in platforms themselves. Recently, we took an ownership stake in [industrial investment manager] Faropoint. They do small-bay, last-mile industrial — more urban infill and smaller deal sizes. And that follows a broader theme around more highly fragmented sectors that are data driven and tech enabled. We want to access those, we want to drive alpha, but we also want to generate scale, and how we do that is through the Faropoints of the world. So, it’s allowed us to access industrial in a different way. 

We’ve done something similar on the retail side, with neighborhood retail and essential retail, where they’ve found the right balance between omnichannel and experiential, but again smaller lot sizes, and you really need to know the tenancy in the local market. So, we invested with a company called Pine Tree and took a significant ownership stake there, and that’s helped us access a more financeable asset class with improving fundamentals that we think we can really ramp over time.

Same thing with single-family rental and build-to-rent. We teamed up with the Hunt family out of El Paso and bought a majority stake in Avanta Residential. It’s a good example of where we really like the build-to-rent space, but here we’ve actually pivoted their strategy through our expertise into doing preferred equity lending to other developers that are in need of a refi and are short on proceeds. So, we’ve been able to provide gap financing. So, you know, investing in a more vertically integrated fashion in some of these nontraditional property types and doing it — some in equity, some in credit, some in between — has been a differentiator. 

What’s the one thing that’s keeping you up at night? And what gives you some comfort in terms of where we are as an industry today?

If the Fed were to cut rates and then pause for a more extended period of time — I don’t think the market is factoring in that potential. It would create real headwinds on the real estate equity side. That said, there would be some stress and distress that would result from that, and, in our high-returning strategies, we have been waiting for it, and I think we’re positioned well to take advantage. The same would hold true for our real estate credit strategy that we’ve talked a lot about today. So we feel like we would evolve appropriately. That said, I do think the market continues to understate it. 

A second one is the regulatory environment. There’s all different types of regulatory aspects to be sensitive to, but to the extent that new statutes, laws and regulations were to be imposed that weren’t expected, that would be a real headwind to the industry. So those would be my two surprises.  

I think my optimism comes from thinking about the two and a half years of valuation adjustments and then all the psychological hurdles that we’re on the precipice of overcoming, coupled with just what we’re seeing in AI, what we’re seeing in all things data, and the ability for us to track not only institutional capital but wealth management and retail capital. It does feel like there’s a lot of cash on the sidelines that is looking to be deployed in real assets like real estate, and the upcoming environment would set that capital up well to lean in. And, historically, what you’ve seen is, when that capital starts to flow, it flows more quickly than expected, and is more scalable. 

Cathy Cunningham can be reached at ccunningham@commercialobserver.com