Real estate market seeing a 'wall of distress' coming as loans mature

Welcome back to The Exchange. My next guest generally operates in New York but recently set his sights W his firm just closed a $23 million first mortgage loan for residential condos in the heart of Silicon Valley, making it the company's first Bay Area investment. Let's dive in here with Northwind Group founder Ron Elias. F Ron, it's great to have you back on the program. Thank you, Kelly, great to be here again. You know, this seems to be there's a lot of people from New York who are looking out West for more opportunities, maybe seeing distressed prices and so forth. Is that the story here? This specific loan is not a distress deal. It's just providing more time to the bar to finish selling the units into the market. But in general, we're seeing a wall of distress coming as maturities at the end of this year on many bank loans on what is considered even stable assets like multifamily that are coming due. And, you know, pricing went down as the interest rate stays higher and there's tremendous issues on balance sheets of traditional lenders, banks, mortgage rates. And, and I think it's going to be a very tough year towards the end of the year and early next year as refinances are coming up. Yeah, which I, you know, people say, well, geez, it's tough business to be in. But for you, that could spell opportunity, right? I think for all private credit managers right now, it's, it's been a very strong year. Private credit funds like ours and others are filling in the gap where banks, many banks have have slowed down or completely stopped lending. So we're providing capital and time for what we think is, is great pricing and valuations for us to come in and and provide, you know, short term solutions until the market finds a new equilibrium. We've heard that new AI companies or expanding AI companies are driving a wave of interest in real estate in San Francisco and the broader Silicon Valley area. Are you finding that as well? Definitely. I mean, there's a huge tech growth momentum around AI companies. It's not just the Valley, Silicon Valley we're seeing it and in Houston, TX we're seeing it even in Florida, a lot of tech companies are moving there and and it's, it's a great growth engine for the market. So in Texas and Florida, you're actually seeing a lot of tech or AI driven, you know, lease deals and that sort of thing. There's definitely movement of tech companies, entrepreneurs into those areas. It's not the same volume as it is on the West Coast, but it's it's definitely growing. And and I think it's going to be a growth engine for those markets. Yeah. Let's talk a little bit about what's going on with markets this week. the Fed has decided to hold, but based on the inflation reports and everything else that could be happening, rates might be a little bit lower in the months to come. What impact is that going to have across commercial real estate, do you think? I think right now the market is pricing accordingly. It seems that September, everybody's betting that September we're going to see the first rate of reduction, probably 25 BPS. That's a healthy sign. It's not going to be a steep decline. So it's not going to help. A lot of projects that, you know, provided loans 3-4 years ago fixed rate 3%, three and a half percent where cap rates were four. And now cap rates are probably 6 and interest rate is, you know, much higher than that. So it's not going to save projects that are currently impaired, but it's definitely going to help drive the economy into a better place. Yeah, we're seeing a slowdown in transaction volume still, but there is an increase in distressed sales. It's not a wave of distress, but there's definitely more distressed transaction happening where notes and properties are trading at steep discounts that for what they traded four or five years ago. Yeah. So across the portfolio, you guys have New York City office assets, you have some real estate, you have some kind of mixed-use. But in general, have you been interested in, in projects that would convert say B or C level office space into residential? This is just an area a lot of people have found is is hard to do in a lucrative way without significant incentives from local governments. Yeah, we actually have three loans right now, one that we closed that is a conversion of an office to resi rental and two that are currently under term sheet for one office building in Manhattan and one office building in Philadelphia that both will be converted to residential. So it's definitely an an asset type we're focused on and it makes sense as these B class properties are finding it tough to find tenants and in general, most of our loans are on residential properties over 90%. But office to resi, we, we, we consider, consider our residential play. Why do you think it's still, so it sounds like you're doing these projects just, you know, at the economics at face value without necessarily needing big tax incentives or anything like that, Correct. Specifically in these three transactions they were purchased in, in recent time, basically a new reduced basis, a great basis for the sponsors doing the conversion and and an even better basis for us as a lender. So it makes sense without a significant reduction in price, significant tax incentives are needed for to make these projects, you know, make sense. All right. And then again, you're doing more in the Bay Area and we'll see what's next. Ron, thanks for joining us today. We appreciate it. Thank you. My pleasure.