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Text on screen: What is the current state of the commercial real estate market?
Images on screen: John Murray, Seray Incoglu and François Trausch presenting at the alts conference
John Murray: The real estate market is clearly the most dislocated we've seen since the global financial crisis. I'd say what differentiates it, at least today, is, in our view, more of a capital markets dislocation versus a fundamentals dislocation.
Text on screen: John Murray, Head, Global Private Commercial Real Estate
Fundamentals are generally okay, some pockets of bubbles, supply bubbles today, but generally okay. It's really the fact that we had a 500 basis point expansion in rates, which has led to volatility, which essentially has crushed liquidity across all four quadrants of commercial real estate. And that's public and private debt and public and private equity.
Text on screen: What are the implications on the public and private sides of the market?
Images on screen: John Murray, Seray Incoglu and François Trausch presenting at the alts conference
John Murray: Let's start with public equities or REITs. REITs are down anywhere from 20 to 80 percent in the case of office in the U.S. So instead of being a buyer to the tune of $50 billion plus a year, they're on the sidelines in many cases looking for liquidity themselves. Then when we think about the public debt markets, i.e., the CMBS markets, clearly there the volatility in the fixed-income markets has crushed that business. In a volatile market, it doesn't make sense from a business perspective to be a CMBS lender. So that part of the market is gone in terms of providing liquidity in the sector.
In thinking about the private side, the banks clearly front and center in terms of pressures there. I think the fundamental point there is that bank balance sheets are bloated to the extent of 30 percent-plus over the last five years. What that means, again, is that instead of being liquidity providers today, in many cases they're looking for liquidity themselves. Throw on top of that regulatory pressures. Throw on top of that, in some cases, headline pressures. They as well, again, are now looking for liquidity versus providing it and looking to reduce their exposure.
Text on screen: Where are the opportunities?
Images on screen: John Murray, Seray Incoglu and François Trausch presenting at the alts conference
Text on screen: Seray Incoglu, Portfolio Manager, CRE Liability Management
Seray Incoglu: There are several in the credit space that range from sort of lower yielding to higher yielding. I think we're specifically seeing an immediate surge in transitional lending. So transitional loans are those loans where you're transitioning, as the name calls it, an asset, whether it’s you know the project is in lease up or there's some sort of renovation, or you're doing a TCO, a takeout where the construction just is nearing completion, but you need to lease up the project.
Text on screen: François Trausch, CEO and CIO, PIMCO Prime Real Estate
Francois Trausch: We have now the opportunity to really be very active while the banks are on the sidelines. I think the opportunities for large tickets which banks no longer do they have to syndicate that loan-to-own strategy because we do have professionals who can manage the assets, gives us a lot of flexibility even afterwards when you have to renegotiate some of the covenants. So having that flexible capital to play the capital stack.
Text on screen: What other areas is PIMCO focused on given current market conditions?
mages on screen: John Murray, Seray Incoglu and François Trausch presenting at the alts conference
John Murray: Debt is clearly where we see the best value. With respect to equity, the key word there is patience. We do think it's going to get worse before it gets better and so to the extent we're looking for opportunities there, it generally needs to be a dislocation situation. With respect to the secular, there, again, we're focused on areas that we believe in the secular tailwinds. Francois mentioned residential as a longer term tailwind, also certainly digitalization, i.e., data centers, again, in terms of just the secular demand growth there, we've seen that supercharged of late with AI.
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Text on screen: PIMCO
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