Episode 75

DECEMBER 14, 2022

Abbe Borok on opportunities in the commercial mortgage market

Abbe Borok, Managing Director and Head of U.S. Debt. at BentallGreenOak, discusses why there could be significant opportunities for investors in the commercial mortgage market in 2023.

Steve Peacher: Hi, everybody, it's Steve Peacher, President of SLC Management. Today I'm with Abbe Borok, Abbe thanks for joining. Abbe is the head of real estate debt for BentallGreenOak in North America, and we think this is really an interesting area as we move into the next year. So, I’m anxious, Abbe to talk to you about what you see.

Abbe Borok: Thanks for having me, Steve.

Steve Peacher: It's been it’s been a volatile year in markets, I think. You know, and there's a lot of questions about real estate as interest rates have risen. So, I wonder if you could, we could start by having you speak specifically about the landscape for commercial mortgages as it's evolved this year in 2022.

Abbe Borok: So, 2022 has definitely been a market characterized by unprecedented volatility across asset classes and the real estate debt capital markets have not been overlooked. However, from the perspective of the balance sheet loans that we're making across our debt portfolios, we've still been able to provide strong returns while maintaining a very defensible position in the capital stack. What does that mean specifically? So across CM one and CM twos, where we invest on behalf of SunLife and our other third-party insurance clients, we've been able to continue to deliver spreads that present a compelling premium to other debt products we see in the market, while also lowering our attachment point. And from the CML three and value add lending perspective, we can achieve really know what historically have been equity-like returns. So, in short for commercial mortgage lenders that are able to be nimble in the market while maintaining their discipline, this CML space has become increasingly interesting over the second half of 2022. So, for lack of a better description, it's a lenders market.

Steve Peacher: So, as you look forward to 2023, nobody of course knows what's gonna happen with rates or with real estate prices. But you know, it looks as you say, it looks like a really interesting environment to be a real estate lender. So, talk about the next year. What do you? What do you see? What's the landscape look like for commercial mortgage lending next year?

Abbe Borok: So, big picture, we believe 2023 and 2024 will be very strong vintages for commercial mortgages loans, really across the risk return spectrum. Firstly, while investment volume will most certainly be down, and that does drive debt originations to some extent, we estimate there will be about $600 billion of maturities in the next 24 months that will be in need of a refinance. Some will qualify for a more traditional refinance, but many will require a more structured solution. And second, the pull back that we've seen from two segments of the lending market, the banks and the securitized lenders or the CMBS lenders, we think that will continue in the near term and this pull back will continue to present opportunities for like companies and their affiliated investment managers to take market share really by thoughtfully and prudently deploying capital into this void that's been created.

Steve Peacher: And as you think about the coming year, how are you getting your team geared up to take advantage of these opportunities? And if you think about the market opportunities, what's at the top of your priority list.

Abbe Borok: Sure. Well, the good news is, we have a very seasoned team here at BGO spanning real estate debt and equity, that have seen these cycles before and understand how to be both nimble and disciplined in a dislocated market. We've invested through up and down cycles, and while we have really structured our debt products to be cross cyclical in nature, we're particularly excited about the investment opportunity for the reasons I've mentioned, and are prioritizing the outreach to our clients to ensure that there's awareness about all of the real estate debt products and how well positioned they are in the current market environment. And to expand upon that a bit, and I know you're well aware of this point Steve, but we're continuing to spend time with our clients managing insurance capital, because whether it's CML’s held on the balance sheet or CMLs held in a fund format, the capital treatment for these investments are particularly compelling. So, you know, we're gonna stick to our knitting on what's important from a lenders perspective, laser focused on underwriting and tight loan structures and lending to borrowers that we've seen perform across cycles, but expect 2023 to be a very interesting year.

Steve Peacher: Well, we've had a chance to talk about this segment over the last couple of weeks, and I, you know, I think it's I, obviously across SLC, we are invested in a lot of sectors of the credit market - investment grade, below investment grade, corporate credit, other forms of credit like securitized. I think when you look at commercial mortgages over the coming year it's gonna be one of the best opportunities in the credit markets. And also, as you say, you mentioned CM one CM 2 below. Investors can kind of pinpoint where they want to be on the risk spectrum as they look at this market, too which I think is another great advantage. So, I know you're excited about it, and money is being allocated at SunLife, and we think that there's a great opportunity here. This is a this is a bell I think we're trying to ring. So, it's exciting. Let me end by asking you something completely unrelated to commercial mortgages. I know that you got a lot of soccer fans in your family, and you're one. So, tell everybody who's gonna win the World Cup?

Abbe Borok: Oh, well, well you know I can't help but look at a few of these underdogs specifically. Morocco, that's in the semifinals now, first African team advanced to the semis and with a really amazing header goal. So, we've got, you know, France and Morocco coming up here shortly, so we shall see. You know as someone who grew up playing and watching U.S. soccer, and especially got to watch this year with my kids, I think it's important to note that we had a very young team this year, so, and we got through to the knockouts. So, 2026 we're going to be on home turf hopefully we'll be well positioned.

Steve Peacher: Given who's left? Who are you pulling for?

Abbe Borok: I think Allez Les Bleus? I think France is gonna win it.

Steve Peacher: Yeah. Well, that'll be fun to watch. Well, listen thank you for your time, exciting market opportunity as we move into next year. So Abbe thanks, thanks appreciate it.

Abbe Borok: Thank you.

Steve Peacher: And thanks everybody for listening to this episode of “Three in Five.”


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