CRE Debt Landscape: Q&A with Northwind Group’s Ran Eliasaf 

The good news is that there is a huge investment opportunity providing rescue funding for debtors looking to refinance. Although banks are resuming lending to private equity-backed companies, they are unwilling to engage in real estate debt, which is having a detrimental impact on their balance sheets. Private real estate debt managers are in a favorable position to seize this opportunity. 

However, real estate managers are facing the challenge of refinancing real estate loans in their portfolios at higher interest rates than expected, which may significantly reduce their earnings. Furthermore, the same interest rates that potentially provide larger returns than private lenders have seen in years are raising the cost of capital and making real estate valuations uncertain. 

Ran Eliasaf, founder and managing partner at Northwind Group, a real estate private equity firm and debt fund manager with $4 billion in assets under management, expects the growing trend of private lenders stepping in to provide loans to continue.  

Given the systemic risks are larger, he also observed that banks and debt funds are lending at lower loan-to-values (LTVs) than a few years ago. He added that residential properties continue to be preferred among lenders because of their resiliency in today’s environment. 

CM: How does the commercial real estate private debt landscape look today? 

RE: As many banks’ financing activity has slowed due to balance sheet issues caused by rising interest rates and other macroeconomic factors, private lenders, like Northwind, have been able to step in and provide loans to high quality properties and sponsors that typically would have received a bank loan. We expect this trend to continue with private lenders / debt funds growing their market share in the real estate lending space over the next 12-24 months. 

CM: How does the private real estate debt market compare to other sectors of corporate credit investing? 

RE: Real estate debt is by its nature asset-backed – there is a myriad of property and collateral types offering immense diversification. While both real estate lending and corporate credit are influenced by macroeconomic trends, the value of real estate tends to adjust slower than the stock market.  

To invest in real estate credit, one needs to have a deep understanding of the underlying market and current trends. In its nature real estate is a very local business and to navigate successfully requires specialized knowledge of each sub-market and property type. Northwind is focused on providing first position loan on residential assets in NYC and other gateway cities in the U.S. 

CM: What loan structures stand out now as promising opportunities? 

RE: Across the board, banks and debt funds are lending at lower loan-to-values (LTVs) versus a few years ago as the systemic risks are higher, and value is harder to determine due to volatility in the capital markets and interest rates. It is currently very difficult to determine what will stabilize cap rates of properties, thus lowering LTVs provides a bigger margin for error. We see the most promising opportunities in senior secured debt with limited leverage and avoiding mezzanine debt in the CRE space.   

CM: Are there any particular property types that lenders are more likely to lend against today? 

RE: Residential properties remain popular among lenders due to their resilience in the current market environment. In the post-pandemic era, there has been caution around office and retail properties as there continues to be high vacancy rates and declining pricing in these two asset classes. 

CM: How do you see the pool of lenders evolving over the coming year? 

RE: We have seen many banks, especially regional banks, scale down their financing activity due to their over exposure to commercial real estate. Additionally, many loans that were given in the last 5-7 years in which the property value dropped are unable to refinance or sell in an amount that would pay-off the loan.  

This has created dislocation in the capital markets which private lenders, such as Northwind, have been able to capitalize on. As a bank’s financing activity has slowed, opportunities have been created to provide loans to high quality properties and sponsors that typically would have a bank loan. We expect this trend to continue with private lenders / debt funds growing their market share. 

CM: Given the performance of the commercial real estate market over the last 18 to 24 months, have many institutional investors switched their real estate investments away from publicly traded companies and towards private equity funds? 

RE: There has been a noticeable trend of institutional investors increasing allocations to private real estate funds, seeking better risk-adjusted returns and more control over investments compared to publicly traded bonds and REITs. 

CM: How much are technologies like artificial intelligence and data analytics being used to help with operational aspects like target identification and digital transformation, for example, both within and among PE real estate firms and portfolio companies? 

RE: Technologies like AI and data analytics can be utilized during the underwriting process. Northwind has recently developed its own in-house software that collects data, such as property pricing, operational efficiency, tenant occupancy, and other key data points to consider while exploring potential loans. 

CM: The economic repercussions from the pandemic and its attendant interruptions have had an enormous impact on CRE asset prices. What opportunities might emerge from the challenges? 

• Distressed asset acquisitions 

• Distressed debt 

• Refinancing as loans mature 

• Repositioning of underperforming assets – Class B/C office conversions to residential, for example