Deer Park Road Management is placing distressed commercial debt in its headlights.
The Colorado-based hedge fund launched a commercial mortgages fund targeting office-backed debt, Bloomberg reported. The Commercial Mortgage Opportunities I fund is the first of its kind for Michael Craig-Scheckman’s firm.
The company is looking to raise as much as $500 million for the fund, according to Chief Investment Officer Scott Burg, targeting investors from Europe and the Middle East. The fund has an 8 percent hurdle rate, which is the minimum rate of return required for an investment.
“The volume of distress in the office space has led to price dislocation and we’re seeing commercial mortgage-backed securities trade at some very deep discounts,” Burg said.
Deer Park has dipped into similar waters before. After the Great Recession, the hedge fund bet on discounted mortgage- and asset-backed securities, a winning gamble for the company.
Investing in commercial debt today is likely a long-term play, as valuations sink and defaults rise in the aftermath of the pandemic and the Federal Reserve’s frequent rate hikes.
Wall Street has been circling the distressed commercial real estate market for months, split between debt and the assets themselves. Goldman Sachs, Cohen & Steers, EQT Exeter and BGO are among the firms that raised funds to acquire struggling properties at a discount.
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Data firm MSCI said in May that more than $38 billion worth of office buildings nationally were at risk of default, foreclosure or other distress, the most distress in the sector since the fourth quarter of 2012. Last year, a lowly 35 percent of office loans converted into commercial mortgage-backed securities were paid off upon maturity, according to Moody’s, the lowest share in its 17 years of tracking.
Deer Park has more than $3 billion in assets under management. In 2022, it invested $15 million in BidMyListing, an online platform that enabled real estate agents to compete for listings; the startup has since morphed into Redy.