CRE: Storm’s A Brewin’

Executives from Cantor Fitzgerald, Blackstone, Goldman and others have all predicted that we will see over $1 trillion in defaults in commercial real estate in 2024— that's a lot! In fact, at The Real Deal Forum in NYC last week, Howard Lutnick, CEO of Cantor, said he expects to see more than 1000 of the 4000 banks in the US go out of business in the next 12-18 months, due to the severe level of defaults that are being anticipated. This market has already faced a lot of headwinds, but the future is looking a little more like a hurricane as hopes for rate cuts begin to dissipate, compounding investors' anxiety about the future.

Here’s the crux of the issue: When we were in a near-zero interest rate environment, many sponsors utilized floating rate debt, which initially provided them with a lot of flexibility. But as the tides turned—we saw interest rates skyrocket, asset values plummet, and banks begin to tighten... really tighten, making refinancing impossible for some.

Leverage is a valuable tool; in fact, commercial real estate sponsors often use 60-80 percent leverage. But when you see an asset's value suddenly plunge by 20-40% or more, just like that, all the equity is gone. Now, you are either handing over your keys or trying to raise more money to recapitalize the asset. And that's tough to do in this climate! It's a dramatic shift, and it's reshaping the market, rightsizing values. That's why we are seeing many major institutions putting together multi-billion-dollar funds to take advantage of some of the opportunities that lie ahead.

In investing, one person's tragedy is another person's opportunity.

This is why secondaries are the talk of the town these days, and candidly, it’s the reason why we built LODAS. We've created a platform that allows high net worth and institutional investors to explore buying opportunities in alternatives, while also enabling current investors in alternatives to find an exit—whether due to a life situation or an unwillingness to ride out the impending storm. This type of access to liquidity in alternatives didn’t always exist.

During the financial crisis of 2007-2008, there was nowhere to hide. Those who were invested in real estate had to ride out the storm, even if their investment plummeted to zero. That crisis gave rise to a new wave of companies designed to create liquidity for traditionally illiquid assets, starting with SecondMarket. They created the first "exchange" for private companies like Tesla, Facebook, Twitter, and LinkedIn, all before they went public. Nasdaq ultimately acquired them and rebranded the service as NASDAQ Private Markets, after which other companies followed suit.

While LODAS doesn’t trade private companies today, it does focus on illiquid funds, mostly real estate, energy, and private credit. We have deep connections with other marketplaces and often partner together with them to help funds and investors find solutions.

While the future for many real estate investments looks a little gloomy, we are excited that there are marketplaces today that offer optionality where it once didn't exist. Contact us at sales@lodasmarkets.com if you want to learn more. You can also follow us on LinkedIn to stay up-to-date on all that we are doing.