Longtime investor Sonny Carsi predicts commercial real estate may continue to have problems in 2024, but will recover in 2025.
Concerns about commercial real estate intensified last week after New York Community Bancorp posted a $500 million reserve for real estate loan losses. Kalsi, who oversees about $80 billion of private funds invested in commercial real estate around the world at BentallGreenOak Group, has been through it all before and isn't pushing the panic button.
The 56-year-old investor sees opportunity in the painful dislocation currently making headlines. He said there could be some gains in the most troubled sector: office buildings.
Mr. Kalsi, now co-CEO of BGO, started the advisory firm in 2010 with several veterans of Morgan Stanley's real estate investment division. A 2019 merger gave majority ownership of BGO to Canadian insurance company Sun Life Financial.
BGO handles a wide range of real estate properties, from data centers and cold storage to apartments and offices. The company's office tower at 425 Park Avenue in Manhattan includes trophy tenants such as hedge fund giant Citadel.
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Individual investors may be more familiar with publicly traded real estate investment trusts, known as REITs. But most of the capital in commercial real estate comes from private entities like his BGO, which is provided by insurance companies, pensions, endowments and wealthy individuals. Compared to REITs, private funds can leverage more leverage, make riskier bets, and pivot more quickly to seize new opportunities.
Kalsi said the troubled office market will eventually move out of the penalty box. With people working from home, around 20-25% of overall office demand has been lost, Kalsi admits. “I don’t think we’ve reached rock bottom yet in terms of inauguration,” he says. “But 70% is there.”
He said that while the bottom quarter of office buildings (older and unrenovated) are dead, luxury buildings in the top quarter of the market (such as 425 Park Avenue) are full and command high rents. It is said that they are charging.
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“Money is made from the middle 50% of office assets,” Kalsi says. “Everyone thinks it's lost, but it's not. That's where people end up buying.”
BGO is also actively investing in offices in Asia, and Kalsi said there are no issues with working from home.
Multifamily housing or apartment buildings have long been widely regarded as the haven of real estate in the United States. But Kalsi, whose BGO owns 80,000 units, can say with certainty that rents are falling in some markets, such as the Sunbelt, where aggressive bank lending has led to excessive new construction and oversupply. .
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“If you look at where people are expecting short-term stress, that's not the case,” he says. Number 1 is in the office, but Number 2 is actually in the apartment complex. ”
BGO's strongest areas of expertise are industrial property and data centres. Construction of a cold storage facility has been underway for several years. Kalsi said his warehouse assets used to be good for 20 years, but automation and power needs are making them functionally obsolete after 10 years.
Banks' reluctance to expand commercial real estate lending has created an opportunity for private credit providers like BGO to earn equity-like returns on loans. That won't last long, Kalsi says. Property owners cannot afford to pay high interest rates for long, and the supply of private credit is small compared to banks' normal supply capacity.
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He believes banks will return to real estate lending once the Federal Reserve finally begins lowering interest rates later this year. The spread between real estate bid and ask prices is starting to narrow enough to allow trading to resume.
“I think 2025 is when the wheels start turning again,” Kalsi says.
Email Bill Alpert at william.alpert@barrons.com.
