Vultures circle as distress looms for commercial real estate

Investor Patrick Carroll expects high interest rates, record maturities to create “perfect storm”

CARROLL's Patrick Carroll (Illustration by The Real Deal with CARROLL and Getty)
Patrick Carroll (Illustration by The Real Deal with Carroll and Getty)

Last week, apartment developer Patrick Carroll launched a venture to provide rescue capital to apartment owners across the Sun Belt. The platform plans to invest $250 million in equity to troubled borrowers.

Carroll is not alone. As rising interest rates and a record amount of debt put more real estate owners at risk, a growing number of players are preparing to feast on distressed assets.

Commercial lending giant Greystone said Monday that it had formed a venture with Inlet Real Estate Capital to provide short-term distress financing to struggling owners. And Barry Sternlicht, whose Starwood Capital raised more than $10 billion last year to fund distressed real estate plays, said in a recent Bloomberg TV interview that he sees “incredible opportunities” in companies with “broken balance sheets but not broken assets.”

“You’ll see a lot of loans being sold,” Sternlicht predicted.

Interest rates have broadly fallen for the past 40 years, allowing real estate owners to refinance at lower rates than their previous loans. And ever since the economic crisis of 2008, financing has, for the most part, been readily available.

But the Federal Reserve’s repeated rate hikes this year have put real estate owners in new and perilous territory. Borrowers who can get new financing are forced to take on loans with higher rates, in some cases plunging their properties into the red.

This leaves cash-strapped borrowers with two options, according to Carroll: find rescue capital or face foreclosure.

“The only solution is to come in with fresh capital and let [property owners] live to fight another day,” said Carroll, whose real estate investment firm, which is separate from his new rescue-capital venture, has about $7.6 billion in assets under management.

On top of providing rescue financing, Carroll is looking to acquire the shares of publicly traded multifamily REITs and take them private. He did not disclose which ones he is looking at, but described it as a “way to buy large portfolios at a discount.”

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Greystone's Hafize Gaye Erkan (Greystone)

Greystone’s Hafize Gaye Erkan (Greystone)

Greystone and Inlet plan to offer both debt and equity to struggling property owners. Once the properties are stabilized, the venture partners said they can offer long-term, fixed-rate financing such as commercial mortgage-backed securities or agency financing. The joint venture will target transactions between $5 million and $50 million across the U.S.

Inlet Capital principal Ryan Jantzen, who was previously co-head of origination at Ladder Capital, said in a statement that with a record number of loan maturities expected in the next year, “CRE investors and lenders may find themselves in a difficult position to refinance.”

The alarm bells are not new. Many predicted wide scale foreclosures and distress sales at the onset of the pandemic.

Daniel Lebensohn, head of investment firm BH3, told the Wall Street Journal in 2020 that the oncoming crisis presented companies like his with a rare opening.

“There are people that do have dry powder, like us, and that will recognize this as one of the greatest buying opportunities of the century,” he said.

But the anticipated wave of distress didn’t come. The Federal Reserve slashed interest rates and government loan programs kept businesses afloat.

Now the math has changed.

Many large banks have already pulled back on lending. CMBS issuance has plunged, according to industry sources and Trepp, a data service that tracks securitized mortgages.

“It is really the perfect storm,” said Carroll. “People that bought at high 2 caps and 3 caps [rates] now owe more than their properties are worth.”