Distress Market Moves From Buying to Lending

New lenders enter the market, but how much will it cost to get that needed financing?

By Erik Sherman | January 19, 2024

Taking advantage of distress is usually associated with buying properties at deep discounts. There is a second version, where lenders, including new ones that enter the market, provide the financing that banks have shied off from doing. However, the availability comes at a cost.

Oaktree Capital —big in distressed debt, according to MarketWatch — is eyeing credit as a fortuitous occasion, particularly in CRE. “Clearly, the most acute area of risk right now is commercial real estate,” the co-CEOs said in a Wednesday client note, the story reported.

“That’s because the maturity wall is already upon us and it’s not going to abate for several years. There’s a need for capital, especially for office properties where there are vacancies, rental growth hasn’t materialized, or the rate of borrowing has gone up materially over the last three years. This capital may or may not be readily available, and for certain types of office properties, it absolutely isn’t available,”

Another reading: there will be money and it will cost.

Oaktree sets the groundwork with two aspects of its six-part investment philosophy. One is the importance of market inefficiency: “We believe there are less efficient markets in which dispassionate application of skill and effort should pay off for our clients, and it is only in such markets that we invest.”

Market efficiency is typically framed as a question of information. However, another form is access to opportunity. If all players can tap the full range of marketing conditions, competition is flat. Under current lending conditions, with banks having pulled back so significantly, the remaining choices are generally more expensive loans — distressed borrowing.

The second philosophical point is the primacy of risk control: “It is our overriding belief that, especially in the opportunistic markets in which we work, ‘if we avoid the losers, the winners will take care of themselves.’”

Lenders are still being tight on underwriting. Higher interest rates provide the aggregate result of reducing risk. Even if some loans fail, the remaining, at interest differentials, maintain return on investments. That’s tempting to ventures old and new.