Episode 88

APRIL 5, 2023

Jim Blakemore on real estate debt

Jim Blakemore, Managing Partner and the Global Head of Debt at BentallGreenOak, discusses the real estate debt market in the current environment, including deal volumes, pockets of value, and exciting opportunities for investors.

Steve Peacher: Hi everybody it’s Steve Peacher at SLC Management. Thanks for dialing in to this episode of “Three in Five.” Today I'm with Jim Blakemore and Jim is the head of the real estate debt effort at BGO, has a long history in real estate debt markets both in UK and Europe, also in the U.S. Jim, thanks for taking a few minutes.

Jim Blakemore: Happy to be here.

Steve Peacher: What we want to talk about today is the commercial real estate debt market, obviously there's loads going on in the real estate markets with interest rates up, which mean cap rates are up. You know, there's a lot of, you can't open a paper without seeing an article about office vacancies and what that means for valuations. I think one of the results, you know, we've seen is that transaction volume is down. So Jim, I guess my first question is when you take all that into account what is what does all that – are volumes down? And what does all that meant for valuations in the commercial real estate markets?

Jim Blakemore: Yeah, I think I think you hit the nail on head. I think that the rates are the biggest challenge that we're facing, combined with another which you touched on with offices, is really the change of use in property. So, I think I think there are some sectors where you've got pretty good tailwinds that are pretty helpful for valuations. Where you look at the logistics area, some of the life science in particular, some of the residential where, you know, I think people see over time there's more correlation with inflation. And long term, those are probably asset classes, from a macro point of view, are going to be pretty, pretty attractive to be in. You know, by contrast, I think office with work from home, recession, and just changes in work habits, has meant a lot of office space may not be as relevant today as people thought it would be and that's putting additional pressure on valuations quite a bit. So I think, you know, I'm not, I don't have a crystal ball per se. I think there's probably some more room to go. But in the first two sectors where you've got better tailwinds, I think you're going to see much less movement. But in the office sector, it's, you know, I think it's really challenging. And obviously, as a lender that rolls back into ‘what do you lend on’ and how do you make sure you're lending on something that's going to be relevant long term.

Steve Peacher: Well, your teams, as I mentioned, focus on lending against commercial real estate. I suppose in this market that can create challenges but also creates opportunities. And you lend against different types of real estate. You also lend at different parts of the capital structure. So, one of the things that I think we're able, your teams are able to at BGO and can offer in the marketplace, is an ability for investors to tailor their risk return profile if they want to, you know, invest in real estate loans. So, I guess could you touch on if an investor wants to be exposed to the commercial real estate debt market, how can they pinpoint where they want to be on that risk return spectrum? What are some of the strategies they would use to pick different spots on that curve?

Jim Blakemore: Yeah, no, definitely. I think even taking a step back, I think now is a really interesting time to be involved in real estate debt. While transaction volumes are down, the overall amount of debt capital available has shrunk even more so. So, I think those that are looking at any part of the capital structure in credit, you know, should really have an excellent vintage to participate in. I think we're, you know, we're seeing a wide range. I think there's value in what people would see as the kind of the investment grade side the CM1/CM2 which we definitely are doing quite a bit of in North America and looking at in Europe. And then there's, you know, I think we're doing quite a bit of unleveraged home loans today where we're getting, you know, where there is some real estate risk involved.

Steve Peacher: Well, you know, you and I have talked a lot about it. And this is, you know, sometimes there are times when you want to ring a bell on a sector and say, ‘hey, as an investor, you got to really pay attention.’ I think that's what, now is one of those times when it comes to, you know, thinking about investing in this sector of the markets. You know, one thing you mentioned in the answer, the first question, was you mentioned that people often think of real estate as having an inflation hedge component to it. But at the same time, there's also an economic sensitivity to real estate, varies to some extent based on the sector, but what are your thoughts about, you know, how this asset class fares in an economic slowdown and how might it fare if we in fact are headed to a slowdown, given the fact that central banks are trying to slow global economies?

Jim Blakemore: Yeah, I think, you know, I'm going to take that on from a kind of a credit perspective, because that's really all I've done for 30 years. I think real estate credit, when it's properly structured, is extremely resilient. Now, there are those who perhaps leant on assets that may not be as viable long term as they had probably hoped to. I think, you know, on one hand, today's lending environment is the most exciting that I've been in. But it's exciting in two ways. One, it's exciting that there's less supply and there's still decent demand, and then maybe exciting in it in a less clear way is some of the assets and some of the rules of lending that people use for years are less relevant than they were today. So, lending on Class A minus office buildings in certain cities was a very safe place to be for years. Today that probably has changed. So, I think there is tremendous opportunity, but it's definitely a more fluid market than I've ever seen, which I think, you know, makes it more interesting and definitely allows for outperformance.

Steve Peacher: I suppose the other thing in today's market, as a debt investor, you're getting a double benefit. One is rates are higher, so yields are higher on your loans, but also you're able to lend at adjusted valuations as cap rates have risen and that has an impact on valuation. So, you kind of benefit both ways as a lender against properties if you're making fresh loans in today's market.

Jim Blakemore: Yeah, with without a doubt. Without a doubt. I think the, you know, in the end of the day, we look at, you know, trying to lend on assets that we think are going to be very durable long term, whether it's the asset type, the city, the location, the micro location, the actual physical aspects to the building, and then really choose what our debt per square foot is going to be. And today it's easier to get to what we see as a long-term durable debt per square foot just because prices have come down. And so, no, I think I think you're right. There's a economic pickup, spread pickup, overall return pickup, but also I think a credit pickup as well, which, again, is why I'm in a happy place.

Steve Peacher: Well, let's let me let me end with a question that has nothing to do with real estate. You know, you're a basketball fan, a former basketball player. I know you follow the tournament, March Madness, closely. So, I have two questions for you. One is I know you went to some games recently, but maybe tell everybody how you ended up at those games, which had nothing I think to do with basketball. And then, you know, it's the weekend before, we're recording this, the weekend before the Final Four, kind of an unusual Final Four this year. And let everybody know what, who's your pick to win it all?

Jim Blakemore: Absolutely. Well, I managed to see two of the West regional games, three of them, in fact, because my wife and I took our youngest daughter to see Taylor Swift, and I managed to get a hall pass to go buy some tickets to the West regionals. So, based on that and seeing how dominant UConn was and their depth, I am, I think UConn will win this probably pretty handily. But we’ll find out!

Steve Peacher: Okay. UConn's the pick. Again, I'm not, I don't know if this will we'll be releasing this before the Final Four this weekend or after. But you're on the record. So we're going to see how that turns out. I'm with you on that one. But, you know, we'll see. And I guess the other message is, you know, Taylor Swift has a broad influence. So, not only is she bringing in millions of fans, but she's having an impact on who goes to the tournament. So, that's interesting to me. So Jim, thanks for taking a few minutes today and thanks to everybody for listening to this segment of “Three in Five.”


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