Just a couple of weeks ago, Trepp noted in a new report that smaller balance CBRE loans might be better bets for investors.
According to the firm, CMBS loans below $50 million used to be more in danger of delinquency than loans at or above $50 million. And yet, July showed an inversion of that standard, only the third time in 13 years it has happened. The previous times were July 2012 and June 2020, each one in a period of economic distress.
It’s good to look at counter-trends when they come about because they are often a sign of when you can move against the stream and pick up some value.
Green Street recently reported in a weekly institutional marketplace update another sign that smaller deals were weathering current conditions better than larger.
According to them, $38.89 billion of all properties changed hands in the first half of 2023. In comparison, that number was $55.12 during the same period last year. That was the biggest overall largest six-month decline since 2019. However, in the $25 million-plus category, sales were down 61% year over year. The $5 million-to-$25 million category fell, too, but only 29%.
The reason, according to Green Street and the capital market professionals at 43 brokerages they spoke to, is a shift in who’s doing the business. Private buyers tend to be more active in times of stress. “While they’re hamstrung by high interest rates like their institutional counterparts, their typically much-longer hold periods allow them to view the cost of capital through a different lens,” Green Street wrote.
In smaller deals, the buyers are likely to be private investors, whether family office, high-net-worth individuals, small syndicates, or someone doing a 1031 exchange. High volatility, while potentially troublesome, is also typically a period that can allow strong trades. There is more distress, and if someone has the cash to purchase and hold, they can buy and wait for markets to return.
There is also the dynamic of large versus small players. It costs bigger investors the same time, effort, and resources to consider a smaller deal as a large one. When there is a lot of money to invest, institutions and large corporations typically can’t consider deals below a minimum size, like venture capital firms that can’t invest in companies needing only modest amounts of money to keep going.
Furthermore, private-capital buyers “are also buoyed by slightly better access to debt relative to their institutional counterparts.” They may have “deep banking relationships,” and these days banks, being more cautious about asset mixes, might find smaller deals more appetizing.
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