2024 Fall Issue of Urban Land - 107

side of the equation. Is it on the
rate side or on the asset value side
of the equation; which one has to
concede ground . . . to close the gap
and shore up some of these transaction
opportunities for the health and
strength of the market overall?
Rechler: The first piece is lenders
forcing this capitulation. In some
cases, it's in their own hands, if
they have properties or loans that
can't be refinanced appropriately,
[to write] off what they need to
write off and [try] to move that
debt, whether it's selling that loan
or restructuring it with the borrower.
You're seeing that more in the office
sector, and you're starting to see
that more in the multifamily space, if
lenders are under pressure to reduce
their commercial real estate exposure.
Borrowers
have two choices in
the market, if you have to refinance.
If you have to pay down the loan,
you need to raise equity, because
you're not going to refinance the
same amount that you had before,
most likely, or you sell. We're starting
to see some of those borrowers
now decide to sell versus write that
$25 [million] or $50 million check to
pay down, and that bid-ask spread
is starting to get to a point where it
makes sense to transact.
Hill: Do you think that mezzanine
lending is going to be the key to
unlocking transaction volume in the
market overall?
Rechler: That's where there's capital
on the sidelines, ready to play, and
there's infrastructure there, as well.
One of the challenges has been the
senior lenders. We're out there, and
we provide mezzanine and preferred,
and we could be anywhere from 40
[percent] up to 80 percent. Sometimes,
the challenge is that you don't
have the senior lender there.
The plumbing is clogged because,
if you're a bank and you're being
told by the regulators to reduce your
commercial real estate exposure,
you're not really inclined to originate
new loans until you can get some of
those existing loans paid off.
You see the same thing with
mortgage REITs. Their systems are
clogged with legacy loans, and
they're unable to be as active as
they would normally be in the space.
That is also one of the things that
create the opportunity-this dislocation
and lack of activity of other
credit providers.
What will drive it is [that] we start
having some capitulation and some
level of transaction activity, which
creates some level of transparency
as to where pricing is and what
structures work. Then you'll start
seeing a pickup of speed of clearing
out the market and re-equitizing. But
this is a multiyear process and not
something we're going to get done
in a six- to 12-month period.
Hill: A lot of questions are focused
on banks and banking activity.
What's your opinion on whether or
not, at some point, we will see largescale
defaults?
Rechler: I think we're going to see
a big uptick in the defaults or short
sales. It depends on what sector
we're speaking about. In the office
sector, you can't just kick the can
down the road, because these properties
need capital to maintain the
underlying value, and they're operationally
intensive. So, a bank is more
likely to sell a loan or try some sort
of restructuring where there's a capital
infusion. That is what we've seen
to date.
On the multifamily side, we're
starting to see the defaults already,
and I expect that we'll see more of
them. When you think about multifamily,
what you had in 2021 and
2022 was record levels of transaction
activity [because] people expected
rates to stay low and rents to go
high, and we had the inverse.
We also have a record level of
new development that's coming to
market, particularly in the Sunbelt,
that-again-[was] underwritten
with a view that rates were going
to be lower, which has put some
challenges on those properties. So,
whether it's defaults or short sales,
we'll see how that all plays
. . . through, but it's going to force a
change of ownership or a significant
recapitalization.
Hill: Where do you see the opportunities
to deploy capital these days?
Rechler: Credit solutions, whether
preferred equity, participating in
recapitalizations, providing construction
financing, recapitalizing
funds, or partnerships that need to
be recapitalized. That is probably
the area where there's the greatest
opportunity, if you can be creative
and navigate through some of the
complexities.
But you need to think of yourself
the way we do in that instance,
which is to be part lender and part
partner. If it is pure lending, there
are other players that can do that
at lower costs. You want to find the
stuff that has some complexity in
that area, and I think there's a lot
that's going to happen there.
In the Sunbelt area for multifamily,
we have targeted markets that we
call Eds, Meds, and Well-leds, which
are places that have good education
systems; good health care systems,
which tend to be proxies for where
talent wants to go; and leadership
that's investing in infrastructure,
quality of life, economic opportunity,
affordability. We're investing
in Dallas, Tampa, and Raleigh, [for]
example.
We've been actively putting bids
out to owners and developers that
need to refinance. We've had this
bid-ask gap for . . . months now, and
[we're now seeing] that start to collapse.
Once we start seeing some
price clarification and price transparency
in the market, that will help
accelerate activity, and you'll see
much more of that start to trade.
ULI members can find the entire
56-minute webinar in KnowledgeFinder
(https://knowledge.uli.org). UL
BETH MATTSON-TEIG is a freelance business
writer and editor based in Minneapolis. She specializes in
commercial real estate and finance topics.
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2024 Fall Issue of Urban Land

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