John Murray, Portfolio Manager, Commercial Real Estate, PIMCO
We see many compelling opportunities in the commercial real estate (CRE) market today, particularly in hospitality and retail.
Capital pressure and liquidity shortfalls have led to opportunities for PIMCO to provide rescue capital in the hotel sector and, in some cases, to acquire loans from banks looking to reduce their exposure in advance of regulatory changes.
As an example, we recently acquired a loan on a newly-built hotel in northeast America from a global bank that was looking to divest some of their challenged assets. The loan was neither deeply distressed nor non-performing, but it was technically in default. The bank wanted to shed the default risk before having to take any risk reserves against the loan, and decided to sell it. We acquired the loan at a discount to par (over a 30% discount to the borrowers’ basis on this newly-completed asset), with the seller providing financing on the position.
Currently, the hotel sector is typically underwriting a return to 2019 revenue levels by 2023 or 2024.
In the retail sector, we are also starting to see some early opportunities in a more distressed form. We are under contract to acquire an asset at about a 50% discount to its price under contract just before the pandemic. In our view, that is the type of quantum you need to see in pricing corrections in the retail space for new ideas to make sense – in this case, to convert the property partially into residential use.
Taking advantage of CRE opportunities: debt and equity
The massive dispersion in the CRE sector today offers opportunities to investors from both a debt and equity perspective.
On the equity side, growing capital demand and positive fundamentals have led to offensive opportunities in the industrial and residential sectors to develop or re-develop assets. Conversely, on the distressed side, the lack of liquidity in the hotel sector and building pressures in retail should offer opportunities for development, redevelopment or repositioning.
When looking at debt, while the impact of the pandemic has kept many lenders on the sidelines, we see an opportunity for investors with capital to generate loans at attractive levels. For example, rescue capital for hotels or other assets that need short-term bridge financing, new acquisitions or new developments with attractive debt opportunities and, in select cases, opportunities to acquire notes from banks looking to reduce some of their exposure. Overall, there are significant opportunities to achieve attractive post-COVID valuations at lower loan-to-value ratios – in many cases, at spreads that are 100 basis points or wider than they were pre-pandemic.