Legal Alert

Developing Opportunistic Real Estate Lending Market Poised to Thrive

by Dominic J. De Simone and Siobhan O'Donnell Sachs
October 18, 2023

A unique set of conditions appear to be setting up a market that is primed for opportunistic real estate lending and investing opportunities with private credit positioned to thrive. Higher interest rates, increased operating costs, constrained institutional capital, and a wave of loan maturities are providing the set-up for an extremely favorable market for opportunistic lending and investing not seen for more than decade. At a time when capital is most needed to repay maturing debt and to meet investment, redevelopment, and capital improvement requirements, many projects are finding traditional capital in scarce supply, certainly scarce in the amounts and at the interest rates or yields required to fully pay off contractual debt amounts and recover invested capital. As a result, these conditions are expected to lead to significant lending and investing opportunities for a range of real estate capital providers.

Much of the private credit ecosystem has been in place for years, with a proliferation of real estate debt and equity funds joining a long-established institutional capital provider market. Many of these debt and equity funds have expanded their investment strategies to include a wide range of structures and property classes well beyond the core lending and investing focus with which many initially started. Private credit providers have been active construction lenders, mezzanine lenders, preferred equity providers, and joint-venture partners in addition to pursuing active development and value-add projects. The universe of these providers and their collective investable capital has grown substantially in recent years and that growth is apparently not stopping, even in the face of the well-publicized challenges facing the commercial real estate market. Rather, these challenges have created the environment for many of these funds to thrive on terms and at risk-adjusted pricing that should be better than what has been seen in some time, if ever. It is expected that many of these opportunities will arise out of distressed deals where new capital is required to refinance a loan or to otherwise restructure a deal, or where a property is being sold at a discount. Other opportunities will result from discounted pay-offs, distressed debt sales, foreclosure and receiver sales, and REO dispositions.

A wide range of structures will be utilized in order to successfully execute these transactions based on each situation’s specific issues and needs. Meanwhile, the frequency and range of secondary market transactions beyond traditional securitization will provide liquidity and offer additional opportunities for some. Traditional investment and loan structures will certainly be employed along with more mezzanine loan, preferred equity, and joint venture investments to fill gaps in required capital. “Alternative” or “distressed” investment structures will also be utilized such as rescue capital investments, A/B loan splits, equity participations, and note on note financings, among other structures. Ultimately, each transaction and investment structure will be determined based on the particulars of the given deal and project and on the creativity and risk-tolerance of the parties involved. Meanwhile, many private credit providers will continue to build programmatic platforms further increasing the efficiency and competitiveness of these capital providers and positioning them to thrive in what is likely to be an extremely favorable market for the foreseeable future.

Whether you’re a debt or equity capital provider, a borrower, a fund sponsor or manager, a fund investor, or a developer or operator, Ballard Spahr is uniquely qualified to provide the breadth and depth of experience and perspective that is needed to pursue the opportunities that will likely define the commercial real estate market over the course of the next several years. Our Real Estate Private Credit and High Yield Team has extensive experience advising on programmatic and bespoke debt and equity transactions across a range of deal structures and project types while our Distressed Real Estate Team brings an industry-leading interdisciplinary approach to develop successful deal strategies and maximize investment opportunities. Both Teams are part of Ballard Spahr’s highly-regarded Real Estate Finance Practice.

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