(Bloomberg) — DoubleLine Capital LP sees opportunity in the commercial real estate market despite mounting fears over the industry.
A darkening outlook for office properties, looming debt maturities and regional bank upheaval has spurred a dramatic repricing in commercial mortgage-backed securities. As concern continues to spread, that’s created an attractive entry point for higher quality credit, according to Morris Chen, who manages the DoubleLine Commercial Real Estate exchange-traded fund (ticker DCMB), which launched last week.
“It’s a perfect time, because with all this negative sentiment, you’re seeing a lot of unique opportunities,” DoubleLine portfolio manager Chen said in a phone interview. “By no means are we ignoring it, but there’s a lot of devil in the details as to what’s going on with specific properties. As an active manager, we’re able to pick and choose where we want, do what we like, what we don’t like.”
DCMB, which charges 39 basis points, invests in short duration debt that ranks highly in the capital structure, Chen said. While offices are risky, industrial and multi-family properties have held up well, he said, in addition to retail properties such as shopping centers.
Much of the current worry in the commercial real estate landscape center on the nearly $1.5 trillion worth of debt coming due for repayment before the end of 2025. Morgan Stanley estimates that office and retail property valuations could plunge as much as 40%, potentially fueling defaults.
While rising interest rates at the hands of an aggressive Federal Reserve and default fears have already crimped CMBS deals, those refinancing woes are mainly confined to more recently issued debt, Chen said.
“I’m most concerned about loans done in 2021. That’s largely because those borrowers borrowed at ultra-low rates,” he said. “If you borrowed in 2013 or 2014 or some of the vintages or years that have already had some seasoning and underlying performance growth over the years, there I think there’s a little bit less pressure.”
DoubleLine isn’t alone in finding bright spots among the rubble. Investors such as GMO and Sun Life’s institutional asset management arm say that the volatility in the CMBS market is overdone, and there are bargains to be found among higher quality debt.
Read more: GMO, Sun Life Arm Are Drawn to the Widest CMBS Spreads In Years
Compounding the anxiety is the state of small and regional banks, which have been battered by deposit outflows following the sudden collapse of Silicon Valley Bank last month. Given that regional banks are the biggest source of financing for commercial property owners, it remains to be seen whether the stress will hamper their ability to lend.
But should small and regional lenders step back, it’s likely that players such as private credit funds will step in to fill the void, according to Chen. Additionally, it’s very unlikely that smaller banks will halt their lending entirely, he said.
“The private credit environment will be ripe,” Chen said. “This is the time for private credit to come in and shine.”
In addition to DCMB, the DoubleLine Mortgage ETF (DMBS) which invests in investment-grade residential mortgage-backed securities also launched last week. The new funds arrived just a year after the $92 billion asset manager debuted its inaugural ETFs.
Mortgage-backed securities-focused funds are still a niche corner of the $6.9 trillion ETF industry. The largest CMBS-tracking fund, the $561 million iShares CMBS ETF (CMBS), is passively managed and has dropped roughly 2.7% on a total return basis over the past year, according to data compiled by Bloomberg. DCMB will likely appeal to investment advisors and family offices, in addition to institutional investors looking for exposure to the market, Chen said.
“This is not an equity investment, this is a debt investment,” Chen said. “We get it, there’s a lot of questions surrounding commercial real estate, but I think the market tends to overcorrect in some instances.”
–With assistance from Scott Carpenter.
(Updates with details on other investors eyeing opportunity in the market in 8th paragraph. A previous version of this story corrected size of iShares CMBS ETF and added performance of the fund in penultimate graf.)
TORONTO – One expert predicts Ottawa‘s changes to mortgage rules will help spur demand among potential homebuyers but says policies aimed at driving new supply are needed to address the “core issues” facing the market.
The federal government’s changes, set to come into force mid-December, include a higher price cap for insured mortgages to allow more people to qualify for a mortgage with less than a 20 per cent down payment.
The government will also expand its 30-year mortgage amortization to include first-time homebuyers buying any type of home, as well as anybody buying a newly built home.
CIBC Capital Markets deputy chief economist Benjamin Tal calls it a “significant” move likely to accelerate the recovery of the housing market, a process already underway as interest rates have begun to fall.
However, he says in a note that policymakers should aim to “prevent that from becoming too much of a good thing” through policies geared toward the supply side.
Tal says the main issue is the lack of supply available to respond to Canada’s rapidly increasing population, particularly in major cities.
This report by The Canadian Press was first published Sept. 17,2024.
OTTAWA – The Canadian Real Estate Association says the number of homes sold in August fell compared with a year ago as the market remained largely stuck in a holding pattern despite borrowing costs beginning to come down.
The association says the number of homes sold in August fell 2.1 per cent compared with the same month last year.
On a seasonally adjusted month-over-month basis, national home sales edged up 1.3 per cent from July.
CREA senior economist Shaun Cathcart says that with forecasts of lower interest rates throughout the rest of this year and into 2025, “it makes sense that prospective buyers might continue to hold off for improved affordability, especially since prices are still well behaved in most of the country.”
The national average sale price for August amounted to $649,100, a 0.1 per cent increase compared with a year earlier.
The number of newly listed properties was up 1.1 per cent month-over-month.
This report by The Canadian Press was first published Sept. 16, 2024.
MONTREAL – Two Quebec real estate brokers are facing fines and years-long suspensions for submitting bogus offers on homes to drive up prices during the COVID-19 pandemic.
Christine Girouard has been suspended for 14 years and her business partner, Jonathan Dauphinais-Fortin, has been suspended for nine years after Quebec’s authority of real estate brokerage found they used fake bids to get buyers to raise their offers.
Girouard is a well-known broker who previously starred on a Quebec reality show that follows top real estate agents in the province.
She is facing a fine of $50,000, while Dauphinais-Fortin has been fined $10,000.
The two brokers were suspended in May 2023 after La Presse published an article about their practices.
One buyer ended up paying $40,000 more than his initial offer in 2022 after Girouard and Dauphinais-Fortin concocted a second bid on the house he wanted to buy.
This report by The Canadian Press was first published Sept. 11, 2024.
