Yahoo Finance Fortress, Goldman Seek to Tap the Wealthy for New Debt REITs
(Bloomberg) -- Fortress Investment Group is preparing to raise money from individual investors for a vehicle that finances commercial real estate debt, as money managers seek to meet an expected spike in demand for such loans.
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Fortress — which has traditionally catered to large institutions — filed with regulators this month to set up a nontraded, perpetual-life real estate investment trust. The Fortress Credit Realty Income Trust will finance loans for a range of real estate ventures, including multifamily, hospitality and industrial properties.
Goldman Sachs Group Inc. and Principal Financial Group Inc. each filed in July to make commercial real estate loans through the same type of REIT.
Wall Street anticipates a jump in requests for commercial real estate loans, driven by forecasts that the Federal Reserve will lower interest rates and that developers will refinance billions in property debt. Total commercial and multifamily mortgage borrowing and lending is expected to finish the year at $539 billion, a 26% increase from 2023, according to a report last month from the Mortgage Bankers Association.
The Fed was widely expected to make its first rate cut in four years on Wednesday. Still, Moody’s said in a note ahead of the Fed’s decision on rates that commercial real estate activities “hinge on the clarity of future interest rate trajectory.”
Banks have been pulling on commercial real estate lending, as they’re already saddled with a glut of troubled loans. Institutional investors, meanwhile, have been reducing their exposure to commercial real estate, spurring alternative asset managers to look to individual investors.
“People are getting creative because there’s so much demand” for commercial real estate financing, said Christian Gore, founder of real estate investment firm G-1 Capital Partners. The nontraded REITs, Gore said, “are another way for folks to access retail capital in large quantities.”
Spokespeople for Goldman Sachs, Fortress and Principal all declined to comment. The Goldman REIT aims to initially raise as much as $1 billion, according to its filing.
While many REITs list their stock on an exchange, the firms’ nontraded vehicles will let investors periodically cash in their shares at net-asset value. These types of semi-liquid vehicles are typically marketed to accredited investors, people whose net worth exceeds $1 million — not including their primary residence — or whose annual income exceeds $200,000.
The largest and best-known of the nontraded REITs is Blackstone Inc.’s BREIT, which raises money from wealthy individuals to invest in income-producing real estate. BREIT, which debuted in 2017, had a net asset value of about $56 billion as of July 31. Other major alternative investment managers have also launched their own REITs.
“The private equity shops realized the banks have access to all this cash” held by their private wealth clients, said Matt Sharp, a cofounder of Hamilton Point Investments, a real estate private equity investment firm. “And so they started raising nontraded REITs.”
Capital Gap
Fortress aims to originate and acquire senior-secured, floating-rate loans tied to commercial real estate, according to the filing. It will also invest in residential debt, including property tax liens, single-family rental loans and jumbo mortgages. Goldman and Principal said their REITs will focus on making senior-secured and subordinated loans on commercial properties.
Other alternative asset managers are also getting into real estate financing — with Blue Owl Capital agreeing to buy real estate lender Prima Capital Advisors and Paul Singer’s Elliott Investment Management backing a platform offering short-term, secured loans for residential development.
These ventures could help fill a financing void left by banks that have reined in lending ahead of an anticipated increase in capital requirements. While the Fed recently agreed to cut these proposed requirements by half, banks may still be loath to ramp up lending again even with pared-back rules.
“When bank lenders tighten lending and offer lower loan-to-value ratios,” Principal wrote in its filing, “borrowers will turn to nonbank sources to fill the capital gap.”
Fortress had lagged behind other private equity firms’ efforts to tap private wealth, but it’s starting to catch up.
In February, a nontraded, perpetual life REIT called Fortress Net Lease REIT filed to raise money from wealthy individuals to buy, finance and lease single-tenant commercial properties. As of mid-June, it raised $551 million from investors, according to a filing.
“These vehicles have less scrutiny than a publicly listed REIT,” Gore of G-1 Capital said. “With that comes more flexibility and more creativity.”
(Updates with Moody’s comments on interest rates in fifth paragraph.)
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