Unlocking Alternatives: Opportunities in CRE and the Industrial Sector

Get PIMCO’s latest views on the commercial real estate landscape, our outlook for the industrial sector and four reasons why we’re seeing opportunities in these sectors right now with Devin Chen, portfolio manager, commercial real estate.

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Text on screen: What is PIMCO’s view on the commercial real estate landscape today?

Text on screen: Devin Chen, Portfolio Manager, Commercial Real Estate

Devin Chen: There's a lot of dispersion across the sectors. Industrial has been the strong performer with values actually up versus pre-COVID levels. Multifamily is up as well. Office, lodging, and retail are all down as a whole, and in some cases down still over 10 percent.

Text on screen: We believe commercial real estate sector fundamentals have bottomed

Images on screen: Commercial real estate

Most of the major commercial real estate sectors have bottomed we think in terms of their fundamentals. And going forward we do expect the rest of this year and 2022 to be good years, particularly for hotels, as it's entered what we expect to be a strong recovery period. And we also expect industrial and the multifamily sectors to continue to perform well.

Text on screen: Can you tell us more about PIMCO’s outlook for the industrial sector?

We've been actively investing in the industrial sector for a number of years.

Text on screen: TITLE – Main drivers for industrial sector investing, BULLETS – Desire for ecommerce to get closer to consumers, Elasticity in what tenants can pay in rent

There are two main drivers here. One is the desire by ecommerce tenants to get closer to their consumers, to be able to deliver same day service.

And the other driver is the fact that as a percentage of an ecommerce company's supply chain costs, rent is potentially less than 5 percent. And that implies there's a fair amount of elasticity from these tenants in terms of what it can pay for rent. So these are two powerful drivers which have been exacerbated by the Covid-19 pandemic. And we expect continued tailwinds for the industrial sector.

Text on screen: Why are we seeing opportunities in the CRE lending space now?

Text on screen: TITLE – CRE lending opportunity drivers:, BULLETS – Flexible credit couldn’t be provided by traditional funding sources, Asset level performance impacted by COVID-19, Loan maturities that need to be addressed, Increased transaction activity from sponsors

Number one, even prior to Covid-19, there was a need for flexible credit, which couldn't be provided by traditional funding sources like the banks, the insurance companies, the CMBS market, or the agencies. That's the segment of the market that we focus on, loans that don't fall neatly into one of those traditional funding sources, so called transitional loans.

Number two, Covid-19 has created even more dislocation as a result of its impact on asset level performance. Essentially it's creating more transitional situations that need to be capitalized.

Third, this imbalance is highlighted by the fact that there's a wave of loan maturities that need to be addressed. And the lenders that have been targeting this segment of the market, many have been unable to extend credit due to market volatility.

And finally, there are positive tailwinds in terms of increased transaction activity from sponsors. And we expect fundamentals and valuations to improve from this point forward. So all these factors we think combined are creating some really potentially attractive opportunities.

One benefit of our large real estate platform is we see investment opportunities from a variety of relationships that we have, including through intermediaries, as well as directly from sponsors.

Images on screen: PIMCO trade floor

We have a broad real estate business. We're able to offer real estate counterparties a menu of options, essentially like a one stop shop for capital.

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Disclosure

All information is as of August 26, 2021 unless otherwise noted.

Pre-Covid refers to the period prior to March 2020 and post-covid refers to the period beginning March 2020.

The continued long term impact of COVID-19 on credit markets and global economic activity remains uncertain as events such as development of treatments, government actions, and other economic factors evolve. The views expressed are as of the date recorded, and may not reflect recent market developments.

Past performance is not a guarantee or a reliable indicator of future results.

All investments contain risk and may lose value. Investments in residential/commercial mortgage loans and commercial real estate debt are subject to risks that include prepayment, delinquency, foreclosure, risks of loss, servicing risks and adverse regulatory developments, which risks may be heightened in the case of non-performing loans. Mortgage and asset-backed securities are highly complex instruments that may be sensitive to changes in interest rates and subject to early repayment risk. Private credit involves an investment in non-publically traded securities which may be subject to illiquidity risk. Portfolios that invest in private credit may be leveraged and may engage in speculative investment practices that increase the risk of investment loss. Equity investments may decline in value due to both real and perceived general market, economic and industry conditions, while debt investments are subject to credit, interest rate and other risks. Investing in banks and related entities is a highly complex field subject to extensive regulation, and investments in such entities or other operating companies may give rise to control person liability and other risks. In addition, there can be no assurance that PIMCO’s strategies with respect to any investment will be capable of implementation or, if implemented, will be successful.

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CMR2021-1007-1863310