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December 13, 2013

2013 Real Estate Symposium Debt Panel Report: Uncharted Waters

At the panel “Uncharted Waters— Navigating Today’s Debt Markets,” experts from several major firms discussed debt investment products and opportunities.

Topics: Real Estate

By Kevin Chan ’14 and Amber Ju ’15

Moderator: Patricia Goldstein, Vice Chairman and Head of Commercial Real Estate, Emigrant Bank
Panelists:James Flaum, Managing Director, Morgan Stanley
Sanjeev Handa, Managing Director, Head of Global Real Estate Fixed Income, TIAA-CREF
Michael Nash, Senior Managing Director, The Blackstone Group; CIO, Blackstone Real Estate Debt Strategies

Goldstein opened the panel “Uncharted Waters: Navigating Today's Debt Markets” by asking panelists to provide an overview of current firm activities. Flaum, first to respond, described Morgan Stanley’s primary platforms within debt products. First, the CMBS platform originates small conduit loans comprised of 50-70 pooled loans each in the $5-$150 million range, with an approximate 60-70 percent loan-to-value at a low fixed-rate coupon. This platform also securitizes stand-alone transactions secured by institutional quality real estate, with lower leverage between 50 and 55 percent loan-to-value. Additionally, they originate floating-rate securitized loans for transitional properties, which are typically 75 percent leased if that. Second, the bank lending platform for loans held to maturity focuses on core sponsors and stabilized assets in the 60-70 percent loan-to-value range. Third, the warehouse lending business provides liquidity for loans. Flaum’s team has originated $8 billion of loans in 2013 with a target of $10 billion for next year.

Handa described TIAA-CREF’s business as the origination of balance sheet loans to institutional sponsors with quality assets in specific target markets as well as managing assets for third parties. With almost $15 billion of existing assets, the company expects to add an additional $3.5 billion in 2014. About two-thirds of the current portfolio is in office and retail with the remaining third multifamily and industrial. TIAA-CREF has also been a key player in the CMBS market, involved since its formation in the mid-1990s. Since the recent financial crisis, the business has begun more actively seeking whole loans rather than CMBSs. The business also occasionally securitizes loans on its balance sheet for portfolio rebalancing and risk management purposes. TIAA-CREF continues to believe that commercial mortgages match well with its liability structure due to their secured, call-protected nature, which are currently seeing above-average yields in contrast with comparable rated corporate debt.

Nash followed, describing Blackstone’s strategy as built primarily around floating-rate transitional and bridge lending, focusing in on value added real estate. Formed in 2007, Blackstone’s real estate debt platform is relatively young. However, it has already built a business with $10 billion in assets under management. Including its real estate equity business, Blackstone has $70+ billion in assets under management. Nash went on to describe the three main ways in which the business invests in real estate debt. It invests in mezzanine debt and preferred equity through its mezzanine funds; it does first mortgage lending through its public mortgage REIT, Blackstone Mortgage Trust (BXMT); and it trades CMBS securities via its hedge fund. The debt fund and the REIT aim to create recurring income for investors rather than follow a loan-to-own strategy. In addition, Blackstone is highly selective about construction loans. Nash described a construction mezzanine loan that took nine months to close, due to the challenges in convincing the senior lender that leverage was sufficiently low. The difficulty with the deal stemmed from the complex intercreditor agreements required and the reluctance of senior lenders to accept additional leverage even when subordinated. Nash commented that his funds target returns of 10 to 13 percent, although there are some deals priced at 6-8 percent for stable properties with lower leverage. Finally Nash mentioned that construction lending is riskier and that Blackstone would only consider top markets and top tier developers.

Goldstein then asked the panelists to comment on the competitive positions of their respective firms. Flaum indicated that Blackstone has a first-mover advantage in bridge products. Handa stated that the three firms are direct competitors in the single-borrower space. Where there is less overlap is in conduit-quality assets. TIAA-CREF’s mezzanine fund, operating at a lower tier of leverage than Blackstone’s business, has a mandate to target 55-60 percent leverage with generally well-leased and stabilized properties. Though it does not typically engage in construction lending, it does make take-out loans and commit to fixed rates in advance. He further added that securitized mezzanine loans were not of interest, due to the difficulty in assessing the values of individual real estate assets within pools. He is concerned that the mezzanine market has been bid too high. Flaum agreed the CMBS market is very robust. However, the number of players and value clearly shrank; while there were approximately 40 CMBS lenders at the height of the market with $600-$700 billion outstanding, there are currently about 10-15 lenders and $500-$600 billion outstanding in the market. He worries about substantial risk in the market, as tapering by the Federal Reserve would cause the market to lose liquidity.

Goldstein noted that the CMBS market grew exponentially through 2013 and asked for thoughts on the Dodd-Frank risk retention rules, which are expected to take effect in the space of two years. The panelists were uncertain regarding what the retention rules will be when finalized but foresee that such a change would impact liquidity and cost of capital. Nevertheless, their view is that the market would adapt. For example, the B-piece market may change with the buyer purchasing a larger portion of the bottom. Generally, the panelists underscored that there is more than sufficient momentum to keep the CMBS market afloat.

Turning to opportunities, Flaum expressed his belief that until now, it has been difficult to securitize floating-rate loans that could create an arbitrage. However, he is now seeing more investor interest for securitizations with floating-rate loans, a natural hedge for rising interest rates. He feels that another opportunity is the foreign bank market, which has recently been active in acquiring mezzanine debt. Nash then described Blackstone’s new single family product, a $479 million securitization of rental streams from 3,207 homes. He believes it may be the beginning of a new trend, and that we are now in a good part of the cycle for such product given that many homes are trading at discounts to their replacement costs. The potential challenge is that bond investors must understand the product and be comfortable that it is not traditional multifamily. However, the bond’s premium trading price is certainly encouraging for investors to consider.

The session closed with a Q&A session touching upon Capital Trust’s sale to Blackstone. Timing was perfect for the transaction, since the Fed’s anticipated tapering was brought up just six days after the deal. The outlook on interest rates was also discussed, with the 10-year rate up 100 basis points since January 2013. The panel generally expects a continued rise in refinancing rates and suggests that borrowers would be smart to pay for caps on floating-rate loans today.


The sixth annual Real Estate Symposium took place on December 9, 2013, at the Columbia University Club of New York, drawing 200 attendees representing classes from 1959 to 2013. Please visit the event page for more details and reports on other speakers. Hosted by the Paul Milstein Center for Real Estate and the Real Estate Circle of Columbia Business School, the Real Estate Symposium is an annual educational forum that brings together accomplished Columbia Business School alumni and top industry leaders for a broad-based discussion of topical issues, high-profile transactions, trends, and challenges facing the real estate industry.