A new report from PIMCO underscores the opportunities arising from volatility in the US CRE markets.
Though rents have steadily increased and demand generally continues to exceed supply in the US commercial real estate market, volatility could lower overall private US CRE prices by as much as 5 percent over the next 12 months, according to PIMCO’s John Murray and Anthony Clarke.
The report points to capital flows as the primary price driver in the US market, noting that they have been unstable over the past year “due to fears over interest rate hikes and, more recently, events such as political and economic uncertainty in China.”
The authors highlight the stumbling CMBS market, which despite recent momentum has performed poorly this year, and is in the midst of unloading the well-known $200 billion wave of 10-year CMBS maturities upon the market.
“Reduced dealer inventories and the 10-year maturity wall will quickly alter underlying credit profiles in CMBS and could create attractive entry points for nimble capital that understands CMBS structure and the underlying CRE assets,” the authors note.
Regulatory pressures in CMBS, which would include upcoming risk retention rules, should also “create financing gaps that could be filled by non-bank capital through subordinate debt or preferred equity” — something the so-called shadow bank investors have pledged to do time and time again.
These groups had gained as much as a 15 percent market share of the total CRE lending market as of March, according to a presentation at CREFC’s High Yield & Distressed Realty Assets Summit.
In addition, though continued volatility could support additional foreign investment into the US — several sovereign wealth funds are increasing in their planned CRE investments and President Obama’s Protecting Americans From Tax Hikes (PATH) Act of 2015 reduces taxes on US CRE for many foreign pension funds — this could create further opportunities.
“Disproportionate foreign capital demand for core assets could create attractive arbitrage opportunities for larger platforms that can acquire mixed portfolios from forced sellers,” the report states.