Shifting Debt Landscape Presents Opportunities for Funds - Q&A with Anne Jablonski

More than $1 trillion in commercial mortgages are expected to come due before the end of 2025, according to the data firm Trepp. Borrowers seeking to refinance are facing much higher interest rates and a more cautious lending environment, as well as declining asset values in some cases. Amid the dislocation, investors are raising capital for opportunistic "rescue" or "gap" funds. We spoke with Anne Jablonski, Executive Managing Director, Head of Commercial Real Estate (CRE) for SitusAMC, about what to watch in this shifting landscape. 

Discuss the current state of the commercial real estate (CRE) debt market. What are the key challenges? 

The market is facing the impending maturity of a significant amount of debt in a vastly changed environment. Borrowers feel a sense of urgency to explore refinancing options, but these are narrowing as banks retreat from lending amid regulatory pressure and/or stress in their existing portfolios. The majority of these maturing loans were made by smaller banks, not Life Companies or CMBS, which together represent about 15% of the overall CRE market. Meanwhile, rising interest rates make refinancing more expensive, increasing the risk of default. Office assets, in particular, are facing the greatest challenge as remote and hybrid work appears here to stay. Landlords are confronting higher leasing costs to maintain occupancies, which puts stress on liquidity. Declining asset values add a layer of complexity, and some properties may not qualify for high enough loans to cover maturing debt. As a result, I expect to see more loan extensions, and growth in opportunistic debt funds. 

How can debt funds leverage current market conditions? 

I believe well-capitalized debt funds can take an opportunistic approach to acquiring CRE debt. Targeting higher-quality borrowers is crucial, as this can mitigate some of the market risk. By scrutinizing potential opportunities and carefully structuring investments, debt funds can capture enhanced long-term returns while effectively managing risk. Financing of loan purchases will be key to the overall return strategy. Public mortgage REITS that are trading below book value may be challenged to make new investments or raise capital, in contrast with discretionary closed-end funds. The shorter-term opportunities will be with failed banks, where assets are being liquidated through an FDIC process. These sales will set a benchmark for future sales, mostly from banks. 

How has the role of debt funds evolved in the CRE market over time? 

Over the past couple of decades, we've seen a significant increase in capital raised by debt funds flowing into the sector, providing an alternative avenue for borrowers to secure financing, particularly in light of the retrenchment of banks. Debt funds have emerged as important players, offering creative solutions and capitalizing on opportunities that traditional lenders cannot. This shift has transformed the dynamics of real estate finance and positioned debt funds as key contributors to the industry's growth. Many debt funds also have equity capabilities, positioning them to maximize returns -- versus banks, which may not have equity experience or support from regulators to hold REO. For more than 30 years, SitusAMC has worked with organizations across the CRE spectrum to support diligence, acquisition, and servicing of CRE assets, and we offer deep expertise to clients navigating debt market opportunities. 

Learn more here about how SitusAMC can power opportunities in the distressed debt market.