NYU Schack Special Report: No Credit Bubble Yet

With so much private credit competing for deals, there’s talk of an impending bubble.

The role of private credit in commercial real estate was a key topic at the NYU Schack Real Estate Institute’s 58th Annual Conference on Capital Markets held yesterday in New York City. Panelists from leading firms provided high-level insights on financing, investment, data centers, tokenization, the city and more.

Miriam Wheeler, global head of commercial real estate for Goldman Sachs, disagreed that the private credit boom is headed for bust in CRE. “If you look at recent behavior, investors are quite discerning on credit still,” said Wheeler speaking on the “Global Finance and Capital Markets” panel.

For some CMBS deals that “check the credit box,” Wheeler said, investors have lined up to invest, leading to price compression. But for deals that do not meet investors’ criteria, there is really no demand.

“It feels like because valuations are down, because we’ve gone through the stress in the last couple of years, that our market is behaving with some discipline,” Wheeler said.

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Private credit found a wide opening in real estate when banks stepped back in 2022. Now that banks are more active, private credit and other nonbank lenders are less a competitor and more of a customer and a partner as banks extend “back leverage” to private credit investors borrowing money to finance their loans.

Banks receive much better capital treatment for those loans versus direct lending, Wheeler noted, but back leverage is also less management-intensive. Banks want to hold investment-grade paper and don’t want to deal with workouts.

“We want to do as much back leverage as possible,” Wheeler said. “We want to use our balance sheet where our clients need us, but maybe less of just to go make an opportunistic loan like you might have seen 10 years ago.”

Bryan Donohoe, partner & head of U.S. debt for Ares Real Estate, credited Dodd Frank and the Basel regulations for greater discipline among banks and throughout the CRE debt space.

“I think there is one of the few instances government intervention or regulation actually had its intended consequences, where the behaviors have shifted, and we actually self-regulate,” Donohoe said.

Speaking on the “Global Equity Investment Panel,” Adam Gallistel, co-CEO & CIO for CBRE Investment Management, said he, too, would separate private credit underwriting discipline from spreads. As for underwriting, he said, deals are “healthy” with healthy loan-to-value ratios. Spreads, on the other hand, are “another matter.” They are historically tight, though corporate credit spreads are even tighter.

“I wouldn’t call it a bubble because, even if spreads gap out, a bubble is when you start doing really stupid things with money and advancing too much proceeds,” he said.

How private credit helps boost values

Meanwhile, CRE’s capital needs are “vast,” said Jeffrey DiModica, president of Starwood Property Trust. “The wall of maturities really grew a lot,” he commented.

So it would seem private credit investment is an opportunity that still has runway left. Blackstone Senior Managing Director Jacob Werner said this is a good time to be a lender. While corporate spreads are effectively at all-time highs, Blackstone finds real estate spreads are at median highs. Meanwhile fundamentals are improving: Supply has fallen 60 to 90 percent depending on the asset type, and cash flow growth is coming.

With all the talk of a bubble, it’s often overlooked that the cost of real estate capital has fallen significantly as new lenders have come into the market, Werner noted. Three years ago, spreads were 9 percent—5 percent base rate plus 400 basis points—and today they are 5 percent.

“I think the other side of the coin is, as lenders compete, you’re seeing spreads from them,” he said. “That’s very good for real estate valuations.”