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Recent estimates by CBRE identified that a debt funding gap that had previously existed in the office sector has spread to multifamily properties. This data is based on loans that originated in the 2018-2020 period.
Only a few months ago, in June, a gap of $72.7 billion was identified in the office sector. This has since increased to $82.9 billion, while the multifamily property sector sees a gap of $21.7 billion.
When facing a debt funding gap, it is important to take prompt action to mitigate the risks and negative effects of the gap.
What is a Debt Funding Gap?
To put it simply, a debt funding gap is the difference between the financing needs of businesses and the amount of debt capital available to meet those needs.
According to CBRE, a funding gap exists when investors refinance at a loan-to-value ratio lower than what they’d first borrowed or when the value falls since the loan originated.
What Are We Doing?
When a funding gap exists, it’s very important to take proactive steps if you want to take advantage of the market as an investor.
Stressed and Distressed Properties
A stressed or distressed property is one where the owner is compelled to sell the property under less-than-ideal circumstances. Often, these result in the properties being sold at lower prices than their market value.
As investors, taking advantage of these low prices can be very helpful in entering the real estate market at a lower price, while also making significant returns in the long run.
We are taking steps to approach the market for such properties and adding them to our portfolio. Not only does this result in a more diversified portfolio, it also opens up the opportunity for better future upside - whether through rental income or a profitable sale.
Asset Management
Asset management is critical in this market environment because owners must assess the current state of their portfolios and identify any assets that can generate additional funds and mitigate risk exposure. While proactively managing our properties, we continue to evaluate the performance and potential of each asset so we can make more informed decisions about what to do with each asset.
Your portfolio’s optimization remains a changing thing - when the market changes, your portfolio should as well.
With the new market conditions, we are making sure our existing portfolio is optimized according to the new changes. By managing the diversity of the portfolio, we aim to make sure it remains balanced in terms of risk and return to provide the most benefit in the long run.
Addressing the debt funding gap requires strategic thinking and proactiveness. By taking steps promptly, we can position ourselves in the market at an advantageous position and bring about financial benefits for our investors as well as ourselves.
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