Northwind's Eliasaf says CRE distress could rival 2008

Ran Eliasaf, founder and managing partner of Northwind Group, said commercial real estate distress could be as large as 2008, with rising interest rates and their effect on cap rates as the trigger. "We think there is big distress coming, and I think everybody in this room is sensing it with where [interest] rates are and what it does to cap rates," he said at Commercial Observer's National Finance Forum, held the morning of Election Day at Quorum by Convene.

"You go outside in New York City and leasing velocity and rents are declining, even in multifamily, and I think in many deals that were done the last five years, the capital stacks were upside down," he said. He said a correction could reach the balance sheets of CLO lenders and banks. "It could be as large as 2008. Maybe it's not, but we're very concerned," he said.

For allocators underwriting private real estate debt or rescue capital, the question shifts from cap-rate forecasts to the loan itself. If income has not grown enough to absorb higher rates, a borrower has little left for capital expenditures or a paydown. A lender that stops extending resolves the loan through foreclosure or a sale, which suggests the supply of distressed multifamily paper grows only as patience runs out.

The distress could be especially pronounced in multifamily, according to Larry Kravetz, managing director and head of U.S. CRE and CMBS at Nomura Securities, who spoke in the opening keynote. Kravetz said net operating income has not performed well enough in many markets to offset recent increases in interest rates and cap rates. Lenders are now much less likely to extend troubled multifamily loans, he said, which will lead to more foreclosures and loan sales.

"If there are extensions they are months, not years, but for the most part it feels like the patience with that has run out," Kravetz said during a fireside chat moderated by Krystyna Blakeslee, a partner at Gibson, Dunn & Crutcher. On the borrowing side, he said, "if you can barely pay debt service you can't do capital expenditures," leaving many multifamily assets short of the money needed to maintain them.

Eliasaf spoke on the opening session, called Opening Real Estate Credit Market Report, alongside Northwind partner and head of CRE credit Michael Ainbinder and moderator Brian Steinwurtzel, chief executive and principal of GFP Development. Eliasaf put no probability on the correction, saying, "I don't know the probability of it" — which leaves the timing, rather than the direction, as the variable allocators cannot yet price.