Pender Capital, which focuses on credit-based investments in commercial real estate, is one lender that sees opportunity in the coming wave of maturing commercial mortgages that will need to be refinanced. Scotsman Guide spoke with co-founder and Chief Investment Officer Zach Murphy of the Dallas-based company this past January to get his opinion on the so-called “wall of maturities,” and where he sees value in 2024.
Why does your company view the wall of maturities approaching the commercial real estate industry as an opportunity?
There has been a lot of publicity and a little bit of handwringing when it comes to the massive wall of maturities that will be upon the industry in the next 18 to 24 months. The way we see it is there are two parts to this issue. The first part is about good loans that were made seven to 10 years ago at relatively low rates and with strong underwriting. The loan-to-values (LTV) were pretty conservative. We are seeing really good loans that need to be refinanced. I think for lenders like us who specialize in short-term bridge financing, that’s a great opportunity. We think that maybe in the next year or 24 months the market will be in a better place and our opportunity to get a better long-term financing deal will be possible.
What are you seeing with the second group of loans you mentioned?
The second piece of this is the smaller number of short-term duration loans. A lot of those loans were called stretch bridge loans or high-octane bridge loans. They were highly leveraged and heavily structured deals where debt financing was utilized to the nth degree. Those borrowers staring at the end of a three-year bridge loan with that kind of paper are going to face a lot of really difficult challenges. There are certainly challenges for some loans with this wall of maturities, but we don’t see it as a majority of the loans that need to be refinanced.
What are the inefficiencies in the market that your company is able to exploit?
Size is one of them. In many situations, there are smaller regional players that are involved in short-term bridge lending. They often top out at about $5 million. Our focus is really on the deals that are north of $5 million and up to $35 million. That is our sweet spot. It’s above the local players and below the large institutional players. So, we think from a size standpoint we are in a very opportunistic market where we don’t have to compete with institutional capital on one end or the geographically knowledgeable capital on the other end. Fewer players are in this space because it is a difficult space to understand and underwrite, especially on a national scale.
What sectors are you focusing on for 2024?
We’re focusing on quality of the asset. Some of the newer assets that are coming to market have relative value to them because they trade at discounts compared to the rest of the market. We see value in some of the asset classes that have been discounted in recent years. One of those is retail. In the markets we’re focused on, retail has been performing very well. And from a relative value standpoint, we see some great opportunities in that area.
Another sector is office. I know that’s a scary word right now in commercial real estate, but we are seeing real value in some pockets of the office sector. That’s something that I don’t think you are going to hear a lot of people talk about. However, we still think the office sector has a long way to go before there is light at the end of the tunnel. A third area offering value is in the multifamily space. New assets are presenting some really interesting opportunities.
Much of your focus is on the Sun Belt states, including Florida, North Carolina and Texas. What do you like about this area?
Those markets have been really great. But that is by no means unique to us. Texas has been a great market, and we are headquartered there. We also have seen great growth in the Carolinas. Some parts of Florida, such as the Tampa metropolitan area, have been very good for us. We also like the Jacksonville market. We have only done a handful of deals in the South Florida market over the past 36 months, but we like what we are seeing now in terms of fundamentals and valuations. So, I think we will do more business in the South Florida markets in the next few years. ●
