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(Bloomberg)—DoubleLine Capital LP sees opportunity in the commercial real estate market despite mounting fears over the industry.
A darkening outlook for office properties, looming debt maturities and regional bank upheaval has spurred a dramatic repricing in commercial mortgage-backed securities. As concern continues to spread, that’s created an attractive entry point for higher quality credit, according to Morris Chen, who manages the DoubleLine Commercial Real Estate exchange-traded fund (ticker DCMB), which launched last week.
“It’s a perfect time, because with all this negative sentiment, you’re seeing a lot of unique opportunities,” DoubleLine portfolio manager Chen said in a phone interview. “By no means are we ignoring it, but there’s a lot of devil in the details as to what’s going on with specific properties. As an active manager, we’re able to pick and choose where we want, do what we like, what we don’t like.”
DCMB, which charges 39 basis points, invests in short duration debt that ranks highly in the capital structure, Chen said. While offices are risky, industrial and multi-family properties have held up well, he said, in addition to retail properties such as shopping centers.
Much of the current worry in the commercial real estate landscape center on the nearly $1.5 trillion worth of debt coming due for repayment before the end of 2025. Morgan Stanley estimates that office and retail property valuations could plunge as much as 40%, potentially fueling defaults.
While rising interest rates at the hands of an aggressive Federal Reserve and default fears have already crimped CMBS deals, those refinancing woes are mainly confined to more recently issued debt, Chen said.
“I’m most concerned about loans done in 2021. That’s largely because those borrowers borrowed at ultra-low rates,” he said. “If you borrowed in 2013 or 2014 or some of the vintages or years that have already had some seasoning and underlying performance growth over the years, there I think there’s a little bit less pressure.”
DoubleLine isn’t alone in finding bright spots among the rubble. Investors such as GMO and Sun Life’s institutional asset management arm say that the volatility in the CMBS market is overdone, and there are bargains to be found among higher quality debt.
Compounding the anxiety is the state of small and regional banks, which have been battered by deposit outflows following the sudden collapse of Silicon Valley Bank last month. Given that regional banks are the biggest source of financing for commercial property owners, it remains to be seen whether the stress will hamper their ability to lend.
But should small and regional lenders step back, it’s likely that players such as private credit funds will step in to fill the void, according to Chen. Additionally, it’s very unlikely that smaller banks will halt their lending entirely, he said.
“The private credit environment will be ripe,” Chen said. “This is the time for private credit to come in and shine.”
In addition to DCMB, the DoubleLine Mortgage ETF (DMBS) which invests in investment-grade residential mortgage-backed securities also launched last week. The new funds arrived just a year after the $92 billion asset manager debuted its inaugural ETFs.
Mortgage-backed securities-focused funds are still a niche corner of the $6.9 trillion ETF industry. The largest CMBS-tracking fund, the $561 million iShares CMBS ETF (CMBS), is passively managed and has dropped roughly 2.7% on a total return basis over the past year, according to data compiled by Bloomberg. DCMB will likely appeal to investment advisors and family offices, in addition to institutional investors looking for exposure to the market, Chen said.
“This is not an equity investment, this is a debt investment,” Chen said. “We get it, there’s a lot of questions surrounding commercial real estate, but I think the market tends to overcorrect in some instances.”
–With assistance from Scott Carpenter.
© 2023 Bloomberg L.P.
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