Does the ‘Plethora’ Match the Opportunity?

A Cambridge partner says he’s watching banks and CMBS players to see how many debt funds the market can support

Privcap: What are you going to be watching most closely in the real estate debt market in 2017?

Marc Cardillo, Cambridge Associates: I’m curious about the degree to which traditional lenders—which have been less active over the past few years—start to

get more active. Does the regulatory environment, with the new administration, become a little bit more favorable to them so that they potentially are a bigger player on the real estate lending side?

What do you look for when you are vetting a real estate debt manager?

Cardillo: There are fewer barriers to entry in terms of creating a platform to be a real estate lender, and fewer points of distinction. We look for groups that have the capability to get involved with properties if the market becomes more difficult, and [are] able to foreclose on some portion of properties in their lending book. I think that’s where we see a wider degree of difference, where some groups don’t necessarily have the size to take that on.

What role do you think the CMBS market will play in real estate lending in 2017?

Cardillo: It’s unclear to me what the impact of the new rules will be in terms of CMBS structures—some of which are pretty onerous in terms of the risk-retention piece. That to me suggests that CMBS will be a smaller component of the overall lending market this year, which is probably good for a lot of the real estate debt managers that are out there.

What kinds of deals do you think will be more readily financed in the current market?

Cardillo: Given that we’re later in the real estate cycle, I would think most lenders and most funds will be even more cautious and conservative than they would have been a few years ago. Borrowers seeking lower LTVs [loan-to-value ratios] will find a pretty large universe of lenders that they could work with. But those groups looking for higher LTVs will probably struggle to get deals financed. The heavy value-add transactions may be harder to get financed than the core-plus transactions.

Are you seeing a changing appetite among your clients for real estate debt?

Cardillo: It’s a little bit bifurcated in terms of where we’re seeing demand for real estate debt strategies. For endowment clients that have always been biased towards real estate equity investments, we haven’t necessarily seen them be active on the real estate debt side. Their bias is towards looking for higher risk-return opportunities within their illiquid allocation. They also like the inflation protection that an equity strategy can provide. Whereas, I can see with our family clients and with certain clients outside of the U.S., they seem much more comfortable with the lower return targets and obviously lower risk that comes with the real estate debt funds. That allocation may come from some broader sources—perhaps not just coming out of their real estate allocation— but maybe it’s part of a fixed income allocation or a broader credit allocation that they have.

Does anything concern you about what you’re seeing in the real estate debt market?

Cardillo: We’ve definitely seen a plethora of real estate debt funds being formed and being raised. That gets me a little bit concerned that there is a lot of capital being formed, and maybe that’s dwarfed by the level of opportunity out there. But again, that does depend on a lot of the banks remaining on the sidelines and the CMBS market being less active.