Why Capital Infusions Into Debt Funds Are Surging
The alternative investment type is attracting three kinds of market participants, say Paul Rahimian and Austin Carlson of Parkview Financial.
With more than $5 trillion in COVID-19 relief infused since 2020, inclusive of the $1.9 trillion coronavirus relief package recently passed, confidence in the economy is strong. It has snapped back quickly, and, on average, cash on balance sheets is at an all-time high for both individual investors and businesses.
From a commercial real estate investor standpoint, all concerns aligned with reasons to sit on the sidelines have been quelled. In fact, many such cash-infused investors waiting to get into the game are realizing they have missed the window of opportunity to buy at the “bottom.” Property values have been creeping up gradually on a national basis, and many will agree we are now in a seller’s market.
As a private debt fund for new construction projects, we are experiencing a surge of investor growth resulting from the above trends. We also are confident that we are not alone when it comes to the growth in capital infusion for private commercial real estate lenders nationwide. Below is an explanation of the three types of investor categories and their motivations for infusing cash into this alternative real estate investment.
When a small- to mid-sized personal investor thinks about their investment balance sheet, they are typically focused on the big three: cash, stocks and bonds. But now, the stock market is volatile, cash is paying zero, and treasury, municipal and corporate bond yields are so low that investors are on the hunt for an addition to their portfolio mix to diversify and complement their other investments.
This bodes well for capital infusions into commercial real estate and private debt funds are passive as opposed to the time-intensive nature of ownership in a tangible asset. Bridge lending investments are yielding 4 percent to 7 percent net, while construction lending investments are yielding high single digits to low double digits.
At Parkview, we are also experiencing an influx of foreign capital into the U.S. market, particularly from the Middle East, Asia, Latin America and Europe, as this investor type is searching for yield and feels secure in their capital being backed by U.S. real estate. From our experience, international investors are dealing with uncertainty in their home country (political, economic, inflation, etc.) and there is a sense of confidence that first lien exposure to U.S. real estate is worth the IRS withholding rate and potential risks of investing abroad.
Cash-rich institutional platforms are also looking to infuse their capital into commercial real estate. As the markets remain tight on inventory, especially in the coveted industrial and multifamily markets, they are now eyeing investment in real estate debt. Institutional platforms often do not have a team internally to manage a debt portfolio on their own, so a solution is to search for an existing operator and deploy sizable capital through another platform with the track record and expertise.
To conclude, we think it is important to note that we are experiencing a different situation from the last downturn. The great financial crisis was tough to swallow for many residential and commercial property owners. They pulled out and then didn’t get back in when assets hit rock bottom.
But, as we mentioned above, because many missed the bottom with the commercial market heating up, private, foreign and institutional investors are now turning to investment in private debt—backed by real estate loans. Depending on risk tolerance, many private real estate loans are yielding considerably more than those returns provided by cash, bonds and stocks.
Paul Rahimian is CEO & founder of Parkview Financial. Austin Carlson is head of Sales & Investor Relations.