The US real estate market is on a collision course to address upwards of $1.5 trillion in debt coming due by the end of 2025. DWS Group Co-Head of Global Real Estate Todd Henderson may not be largely concerned about this “wall of debt’s” landfall on commercial real estate, but he does see it shifting paradigms in the credit lending ecosystem.
“The traditional providers of credit [are] shrinking,” Henderson tells Yahoo Finance. “So private credit, from firms like ours and others, it’s a great opportunity for us to get into the market and… generate outsized risk-adjusted returns in the debt space.”
Click here to watch the full interview on the Yahoo Finance YouTube page or you can watch this full episode of Yahoo Finance Live here.
Video Transcript
– There’s a number that’s been talked about a lot, $1.5 trillion in debt that’s going to come due by 2025, and investors needing to refinance et cetera. What does that signal about where the commercial real estate market is set up for 2024 or how it’s set up for 2024?
TODD HENDERSON: I’m not concerned about this, quote unquote, “wall of debt.” I’m also not concerned about the overall office sector’s impact on the real estate market. The office sector is a very small percentage of the overall real estate market. And it represents about 1% to 3% of bank balance sheets.
Banks are very well capitalized. They’re 40% better capitalized than they were during the global financial crisis. So a deterioration in office, a continued deterioration in office, which I expect will happen, I don’t think is a, you know, canary in the coal mine kind of event that it’s going to trigger a massive sell off in real estate, or it’s going to contribute to serious banking challenges.
What I do think, though, however, is this wall of debt coming due and additional regulation that is coming for the banks is changing the dynamic of who provides credit to the marketplace. The traditional providers of credit is shrinking. The banks are not going to provide as much real estate credit in the past. So private credit from firms like ours and others, that’s a great opportunity for us to get into the market and we think, generate outsized risk adjusted returns in the debt space.
BRAD SMITH: It seems like the credit conditions though as well, as we’re talking about this, that could be one of the headwinds that impacts as well construction, going into the commercial real estate market. How are you identifying and looking across that?
TODD HENDERSON: It’s a great point. What we’ve seen in terms of construction, and frankly, it’s the reason why I’m so bullish on the real estate market going forward, particularly in the industrial space and the multifamily or residential space, construction in the industrial space new starts are down 75% from their peak, which was a little over a year ago. 65% in the residential sector, in multifamily, in apartments.
I think what you’ll see in 2024 is this narrative that has really already started in multifamily. And that is, well, rental rates have stalled, or they’re even falling. It’s a speed bump, frankly, along the way because it’s not a demand problem, it’s a supply problem. Right now, we’ve delivered so much. We have the highest level of supply we’ve ever delivered in the multifamily space. But because new starts are so low, in 2025, we’ll be at barely being able to keep up with obsolescence in terms of supply.
