Today’s post is written by Michael Green, Senior Commercial Loan Originator with Counsel Mortgage Group, LLC. Mike writes monthly on the commercial mortgage market. Check back each month for his commentary.

As CRE data reflecting the post-COVID damage emerged last summer (or so), we began to notify you that investors were penciling out shark-in-the-water deals. Last fall and through the winter we highlighted hesitancy/reluctance/inability of traditional lenders (banks) to make “reasonable” CRE loans, either for refi or acquisitions. This activity and posturing was mostly happening quietly behind the scenes, and often by smaller players. The cycle is reminiscent of 2001-2002, and again 2009-2010. As is sometimes said, a blind man on horseback could see what’s coming!

And here it is – we’ve arrived. Goldman Sachs Group, just raised $3.6 billion for its CRE debt fund, West Street Real Estate Credit Partners IV (Bloomberg). Goldman is also adding an additional $1.4 billion capital from its balance sheet, bringing the fund’s total to $5 billion. Interestingly, in their projections to investors showing a 10-12% return, they allow for $2 billion (29%) of leverage.

“The strategy really is to capitalize on what we think is a growing supply-and-demand gap for real estate debt financing,” Richard Spencer, chief investment officer for real estate credit at Goldman Sachs Alternatives. (Bloomberg)

Goldie’s fund will originate, underwrite, and hold loans, making first-lien loans to properties that are undergoing rehab/refurbishment, a change of use, or development. Another target is mezzanine financing to stabilized properties.

Since banks have backed away from CRE and are continuing to tighten standards, the debt side of transactions has been tough to fill. Meanwhile, the equity side has accumulated an abundance of cash.

The Goldman move is the latest in a pattern of big private money entering the CRE market. Last January, SL Green started raising money for a planned $1 billion debt fund. Walker & Dunlop Investors Partners closed its first evergreen debt fund that would support between $450 million and $600 million in lending capacity. Reuters recently reported that US fund firms PGIM, LaSalle, and Nuveen; Canada’s Brookfield and QuadReal; Britain’s M&G, Schroders, and Aviva; and France’s AXA are expanding their reach into private CRE debt. These alternative lenders think the worst has passed the CRE markets. These funds are going to start entering transactions – you can’t give investors 10-12% returns with money market rates!

Although debt funds have a lot of capital, they also expect elevated returns beyond what many borrowers want to pay, which might mean that investors/borrowers remain on the sidelines while looking for “reasonable” deals that will satisfy them.

So, how do you pencil a deal from unreasonable to reasonable? How do you access private lenders for smaller $1-10 million dollar deals? You might consider finding a commercial mortgage broker – Counsel Mortgage may come to mind.