Investing in Commercial Real Estate Debt
A decade has passed since the financial crisis and the collapse of the commercial real estate market. While the U.S. market has bounced back, interest rates are rising, and prices are leveling off. When a market starts to level off and approach its peak, investors start seeking portfolios and away from commercial real estate equity and into debt.
Investing in commercial real estate debt means that you are lending funds to an owner or purchaser of a property. It allows you to collect periodic interest payments and a security charge the property in the form of a mortgage. Investors can act as a lender to the property owner or the deal sponsor. At the end of the mortgage, you then receive the balance of your mortgage principal. It’s important to remember that in debt deals, the investor is at the bottom of the capital stack and has priority when it comes to claiming the payout from the property.
If you are looking to start investing in commercial real estate debt, consider the following factors.
At the end of 2017, there was approximately $4 trillion in outstanding commercial real estate debt, according to the Federal Reserve. This number matures by $300 to $400 billion per annum and is creating a sizable demand for the increase of growing capital. Traditional lending institutions hold most commercial real estate debt, but they have recently been held to tighter regulatory requirements and are much more conservative then they have been in the past. Due to this, the demand for commercial real estate financing continues to grow and will continue to create an on-going debt funding gap.
Commercial real estate debt has multiple options for investments, and each has its risks and rewards. While investing in debt is a lower risk, they are also more speculative and can be higher yielding. The risk varies depending on the debt capital that is chosen. By utilizing capital market technologies to finance and leverage commercial real estate loans, debt investors can strategically boost their investment.
Commercial real estate debt investing can generate a return on a risk-adjusted basis. Any savvy investor looking to start investing in commercial real estate debt should understand what they stand to gain and lose before deciding if debt investing is right for their portfolio.