Fisher says the extend-and-pretend cycle is over and deal flow is returning to fundamentals
For several years, a large share of commercial real estate debt was managed rather than resolved. Lenders extended maturing loans, betting that rates would fall and values would recover before anyone had to take a loss.
That approach bought time, but it also delayed the moment when borrowers and lenders had to agree on what properties are worth in today's market. Capital providers say that process is underway.
One capital provider says the shift is opening a window of opportunity that will stay open far longer than most people expect.
Seth Fisher (pictured top), principal and head of strategic capital solutions at Prime Finance, said the market is moving past the extension strategies that defined the last several years.
"The theme that we are investing around and seeing a lot of activity around is the unwinding of the extended pretend period of the cycle," Fisher told Mortgage Professional America. "I think there was some merit to a lot of the extension execution that was done across the marketplace over the years."
The end of extend and pretend
Fisher said the way brokers and lenders talk about deals has changed considerably.
"The conversation is moving away from will rates fall and by how much, to more of what's really happening at the asset level, to fundamentals and making more decisions around that," he said.
That shift matters because many capital structures were never built to withstand what came next, according to Fisher.
"If you were building a capital structure for a commercial real estate asset in 2019 or 2021, your calculation was interest rates are nothing, basically," he said. "And then it went up 500 basis points. So that makes your math really hard over that period of time."
That repricing process, Fisher said, determines when deals happen and when they fall through.
"Capital structures really need to heal, recalibrate for the new reality that we're in," he said. "As values start to recalibrate, reset to this new normal, then you can start finding transaction activity."
A long runway of opportunity
As a new phase starts in commercial real estate financing, lenders, brokers and clients have an opportunity to recalibrate strategies for the future.
"We think it's a very long window of opportunity because real estate life cycles are pretty long," he said. "There's a natural rollover of loan maturities and capital structures that run their courses and have their life cycles, and that's going to play out over the course of years."
That rollover is already showing up in deal activity, according to Fisher. Owners who spent years absorbing losses on paper are increasingly ready to sell and move on.
"People are saying, okay, I've written my assets down enough, the market's bottomed, it's recovering a little bit, it's time to move on," he said. "It's time to get rid of these legacy positions so I can recycle my capital and redeploy it."
For brokers, Fisher's read on the market suggests deal flow will concentrate among properties whose owners are ready to accept a reset valuation, rather than continue waiting for a rate environment that is not coming back.
"We think that the opportunity set is very broad and durable," he said. "There's a lot of different ways that we can participate in the marketplace. We're buying loans, we're providing debt, we're making equity investments."
Fisher said there is a reason sponsors are choosing flexible capital over fixed-rate debt right now.
"I don't want to lock in my interest rate when treasuries are at 4.60% and lock into that interest rate structure," he said. "So in some ways, that uncertainty is increasing demand for our capital."
About half of Prime Finance's investment activity in recent years has gone toward buying loans in the secondary market, according to Fisher. He said that opportunity spans property types, from multifamily and industrial to office and retail, though each sector is recovering at its own pace.
That shift, he said, is changing what the industry pays attention to.
"It's bringing the focus back to asset fundamentals, really conventional real estate fundamentals of location," he said. "Does this property make money? Can this property make money in a way that I'm getting a return on my investment?"
While there are headwinds in the market, Fisher is encouraged about the near future.
"I'm optimistic about where we're at as a marketplace," he said. "Unlike a lot of different industries, commercial real estate values have reset. We've taken our lumps from a valuation perspective, and that puts us in a pretty good place from a relative value perspective."
Stay updated with the freshest mortgage news. Get exclusive interviews, breaking news, and industry events in your inbox, and always be the first to know by subscribing to our FREE daily newsletter.
