Katy Mao
Managing Director, Real Estate Opportunities at Oaktree
Where in the capital stack are you most comfortable playing today, and where are you finding the best lending opportunities?
We tend to pivot between private and public investments to take advantage of market conditions. Recently, we are finding more interesting opportunities on the public side, primarily in the secondary markets where you can take advantage of lower dollar prices and higher convexity. In the private loan space, we were previously focused on construction and heavy rehab deals, as historically we have seen a flight to high-quality new space coming out of all cycles. For a good part of this year we saw attractiveness in value-add bridge loans for more core assets such as multifamily. However, today there is increased adverse selection given the rate environment and the significantly lower transaction volume with equity investors on the sidelines.
What’s your best advice for borrowers seeking financing during turbulent times?
Emphasis on quality of the lender, how capitalized they are and their source of capital. We’ve seen a lot of borrowers get retraded on price and proceeds at the finish line in this environment, and it is quite painful for equity sponsors who are hard on their deposits for acquisitions or have spent significant legal dollars in a refinancing.
Would you rather finance a well-established sponsor on a Class B office renovation in New York City, or the first-time developer of a multifamily project in the Sun Belt today? Discuss.
Very deal-dependent. We never shied away from office during the pandemic and thought it was a unique window to lend on high-quality Class A assets with very well-capitalized and institutional borrowers who traditionally have not had a need for higher-cost debt. I believe we will continue to see that going forward. Everyone wants to do a multifamily deal in the Sun Belt, but until recently the availability of capital and competition for these types of deals made the risk-adjusted return less interesting. It’s less to do with sponsorship or asset type, and more so with relative returns, leverage or structural protections.
What’s your take on an impending recession? How bad might it get, and what are the silver linings (if any)?
A recession is likely coming. This one feels different in a lot of ways: On the one hand, inflation is raging, so the traditional Fed put is not an option for the foreseeable future, and higher rates and borrowing costs are going to drag on real estate values in an industry that has acclimated to low rates for the past decade. The extent of the reset on valuations remains to be seen as these new cap rates and borrowing rates settle in, but we anticipate this to be significant across all asset classes. On the flip side, the banks are so well-capitalized and reserved that I don’t see a bank-led recession, which should keep mass forced selling of real estate in check. Additionally, bank deposit bases remain elevated, so as soon as they have the green light to lend again, they will be back in the market aggressively.
Money managers still have COVID so fresh in their minds that, in general, they are appropriately positioned from a defensive and cash position, so a nasty redemption cycle should keep them from being forced sellers. Without mass forced selling, this may provide enough time for the capital markets to level set and bridge sponsors to the other end, where they experience a more mild reset in valuations.
With that all being said, there are very interesting times ahead, and we look forward to seeing what next year looks like. Similar to early 2020 at the onset of Covid, our team was extremely active in deploying capital across the cap stack which has resulted in above-market returns.
When will we reach the bottom of the market, and when will we see a thawing in the debt markets?
I learned to never time the bottom during the Global Financial Crisis. Focus on the fundamentals and credit when it comes to deals. However, one of the main issues is we just don’t know what rules to play by. Want to know how hard it is to predict rates? Jerome Powell sets the rates, and he can’t even tell you where rates are going. If I had to give an answer, mid-2023
Lighting Round: Would you rather…
Run a marathon or swim in the Gowanus Canal?
Not excited about either, but running a marathon — I am a big germophobe.
Be a contestant on “American Idol” or be a contestant on “Survivor”?
“American Idol.” Rather be embarrassed but staying alive!
Traverse Jurassic Park on foot, or relive 2008?
Relive 2008 … great learning/growing experience.
Sit in L.A. traffic for two hours or sit in a stalled NYC subway car for 30 minutes?
NYC all the way.
Fight 100 duck-size horses or one horse-size duck?
One horse-size duck! Duck-size horses sound scary!
