Real estate credit also provides attractive income, a trend that seems poised to continue given the higher-for-longer interest rate environment, while hard asset backing and predominantly floating-rate loans can potentially mitigate the erosive effects of rising inflation and interest rates. Another inflation mitigator: Historically, properties tend to appreciate over time, and rents reset regularly to reflect prevailing market rates. Finally, real estate credit can also act as a diversifier, whether juxtaposed against real estate equity, publicly traded bonds, or private loans to corporations.
As for activity going forward, we expect demand for real estate lending to remain robust. Refinancing should continue to be a strong trend. Borrowers who took out loans when interest rates were low in the pandemic years are still facing maturities in a higher-rate environment on properties that have lost value. These owners have a pressing need to either sell or refinance. Lenders that have solid relationships with borrowers, access to scaled and varied capital, and a strong reputation should have plenty of opportunities going forward, even if the economy slows.
Conclusion
It is critical for lenders to be selective and cautious in the current environment. But while market volatility always creates challenges, it can also create opportunities. We are proactively seeking to take advantage of liquidity disruptions and looking for opportunities that can provide attractive absolute, relative, and risk-adjusted returns. We expect that demand for real estate credit will remain high, but that competition will likely intensify in the highest-quality, lowest-risk deals.
From an investor’s perspective, we think real estate credit may help mitigate inflation risk through exposure to collateral-based cash flows, offers the security of a significant equity cushion, and provides elevated current income. Unlike most asset classes, real estate property values have already reset significantly, creating opportunities to lend on high-quality properties at a significant discount to replacement cost. Meanwhile, supply is tight in many sectors, which should help preserve the value of existing assets in strategic sectors and locations. We are watching the market closely, but we expect to be busy in 2025.
