Will 2024 Be The Year When Distressed Commercial Real Estate Finally Gets Going?

If you read the news, you'll know that the commercial real estate (CRE) market has been in dire straits for almost a year, with seemingly everyone, including me, offering an opinion on the extent of the potential damage and when - and where - said damage will be done.

But what I found notable last year is that I didn't see as much activity in distressed CRE - in terms of new launches - as I thought there might be. The pull back in allocations to alternative investment strategies by investors generally was definitely a contributing factor, but still, the investment community is nothing if not enterprising, and I would have thought that there would be more activity in the space.

Still, for those that did, I'm pretty sure that 2024 will deliver some big wins. And there seems to be a few pockets of CRE that should provide some interesting opportunities.

I think that managers taking a long / short approach to commercial mortgage-backed securities (CMBS) might see some success. I've always found this strategy interesting - taking different positions across different tranches of the CMBS bond. It's not one I see very often, probably because it's a niche strategy. But it's one that could deliver whether the distressed market takes off or not because the long book will stilll deliver returns if the overall CMBS bond doesn't fall into distressed territory. And if it does, the short book will take off.

It's not easy getting access to strategies like this for many individual accredited because they tend to be wrapped up in larger, multi-strategy funds which can be difficult to access. But there are some managers that carve out specific strategies into either smaller funds or separate accounts, if you can find them, whether that's in CRE, equities, commodities, and even private markets.

And that's another trend that I expect to see more of in 2024. Regulation generally pushes out accredited investors from niche investments because it's cost prohibitive for managers to spin out a certain strategy into a separate fund. But partnering with a platform provider is one way for managers to do this as it lowers the cost base significantly, opening up the strategy to those that otherwise couldn't get access to it.

Whether more managers choose to go this route or not, time will tell. As it will with the distressed CRE space; Trepp's delinquency rate on offices fell in December after a year of increases, after all. but it'll certainly be an interesting space to watch as the year unfolds.

**The above reflects the personal opinions of the author and is not to be considered investment or legal advice or advice of any kind.

Greg Poapst, "Will 2024 Be The Year When Distressed Commercial Real Estate Finally Gets Going?" (Essential Fund Services International, January 2024)

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