KBS chooses CRE markets first as debt funds turn cautious

KBS chooses a target market before deciding whether to invest through debt or equity, Sondra Wenger, KBS's head of capital markets, told Commercial Observer. Some clients that raised commercial real estate debt funds are waiting for the right deal as lender competition grows, Dan Berman, a partner at HSF Kramer, told Commercial Observer.

Wenger described the sequence as market first, then capital-stack position. "It's so nuanced, but sometimes it's the right time to play in debt, and sometimes it's the right time to play in equity," she said. A market that prices equity out of reach can still clear as a debt deal, she said: "If it's no longer an equity deal because it's gotten too expensive or whatever the reason might be, then we can look at it as a debt deal."

For allocators committing to debt funds, the shift is a deployment question before it is a return question. A manager that raised against a pipeline now contested by more lenders may draw capital more slowly, so deployment pace and pipeline concentration belong ahead of coupon in due diligence.

Wenger said KBS prioritizes growth markets with cross-sector synergies over established ones, and named the North Hills area of Raleigh, N.C., as a market it has targeted for both credit and equity. "We want to make sure that it's an improving market and it's not already established," she said. "We have been focused on places that we really see cross-asset synergy and are able to invest in any level of the capital stack."

Sector comes next. KBS is more likely to pursue a debt deal than an equity deal in hospitality, depending on market conditions, Wenger said.

Berman traced CRE valuation pressure to the 2020 pandemic and the subsequent rise in interest rates, and said the lesson is flexibility across the capital stack. "If you're stuck in a narrow band of what you can invest in, you could end up sitting on the sidelines for a while when there are opportunities elsewhere in the capital stack," he said. That argument runs through earlier coverage of the reset: as Private Wealth Daily previously reported, the equity check now decides who keeps a maturing deal and who cannot.