Pearlmark sees longer road to recovery for real estate capital markets

As published from REFI US, May 28th, 2020, Doug Lyons shares his commentary.

Pearlmark Real Estate Partners sees a longer road to recovery for the real estate capital markets, with the Chicago-based real estate private equity manager believing that stability in the fixed income markets will be a key factor for the resumption of active institutional lending.

Commercial mortgage-backed securities conduits, commercial banks, debt funds and other lenders have largely pulled back from the market amid the Covid-19 pandemic, opening up the doors for companies like Pearlmark that offer mezzanine financing solutions, according to Doug Lyons, managing principal.

“There’s an opportunity to capture some nice transactions at attractive pricing,” Lyons added. “We are actively looking to place capital and we believe that our product, mezzanine gap financing, will be valuable for coming maturities as senior lenders are pulling back on proceeds.”

Although some insurance companies and other senior lenders are still open, lenders are offering lower proceeds. Additionally, senior stretch lenders who were using warehouse lines have also scaled back their efforts.

The company invests via a series of real estate private equity funds and is finishing up the investment phase of its fourth mezzanine fund. Pearlmark’s portfolio is in good shape, with no hotel exposure and very little retail exposure in the fund’s book, Lyons said. Indeed, most of the fund’s portfolio is concentrated in the office and multifamily sectors.

“We haven’t had a single borrower request for relief,” Lyons told REFI US.

As the company works on the investment phase of its newest fund, Lyons noted that Pearlmark is finding it challenging to make sense of the new investment opportunities. It’s looking closely at the datapoints that are available as relate to rent collections when it evaluates opportunities.

“We’re very granular on what is happening with a specific asset and its specific submarket as it relates to collections and we need to be able to see what happened to collections in April, May and eventually June before we fund any investment,” Lyons said. “Because we won’t be seeing a lot of new leasing activity in the office sector, we will have to dig in an understand what net effective rents are and what will attract a tenant to sign a three- to five-year or longer leases.”

The same is true for the multifamily sector, where landlords are having to give free rent to sign leases. “We’ll be looking historically and benchmarking, looking at cashflows and figuring out how to get back to a stabilized economy,” Lyons said. “Our attitude on cap rates is that they probably won’t move much given the low rate environment. Even at a plus or minus 5% cap rate, that’s still a significant premium to 10-year Treasuries.”

It could be a while before the real estate capital markets come back, with Lyons predicting that the CMBS market will need to see a lot less volatility in the broader fixed income markets before it becomes functional again. “The banks have their own existing loan books that they’re taking a close look at. And they also have significant warehouse line exposure to the debt funds. All of their broader C&I and real estate lines are extended as people rushed to borrow on whatever line they could,” Lyons said.

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