SomeraRoad is finding opportunities to invest USD 175m in capital earmarked for real estate credit even though many would-be sellers haven’t yet “capitulated” to the lower prices that have resulted from the coronavirus pandemic, according to founder Ian Ross.
Since the pandemic hit, SomeraRoad has invested roughly USD 60m in “fundamentally and technically dislocated CUSIP product,” including a CMBS 2.0 conduit B-piece, and single-asset/single-borrower bonds, Ross said. Ross also sees opportunity in CMBS with retail and hotel exposure that he sees as “oversold.”
Still, to date there have been a dearth of CMBS credit opportunities because the bid-ask spread is “extraordinarily wide,” he said. Ross’s views underscore complaints by other investors that credit bonds have not shared in the TALF-inspired rally that has lifted higher-rated CMBS, and that some would-be sellers have not yet come to grips with their new lower values, as reported.
Ross expects that to change in 2H20 when he believes the pandemic’s impact will be fully felt. That impact has not yet been felt due to a “a chain of forbearance” in which tenants aren’t paying rent or other bills and building owners aren’t paying lenders.
“We’ll start seeing this burden of payments continue to accumulate and at some point we can’t continue to forbear our way through,” Ross said. “The burden will have to be absorbed” by tenants, landlords, lenders and CMBS bondholders.
SomeraRoad Inc., a New York-based CRE investment firm, has acquired about USD 2bn in real estate since Ross founded it in 2014. It has pivoted quickly to focus on CRE debt, recently tapping veteran CMBS exec Amit Patel as managing director and head of CMBS trading.
“Historically we’ve been focused on using real estate debt to find CRE investment opportunities,” Ross said. “When this market shock occurred, it was a 180 in that thesis. Now we’re using the real estate to find debt.”
Ross sees intrinsic value in buying real estate at a lower basis and rejects the notion that the pandemic will result in a contraction in the amount of real estate space used.
“Humans need to live, work and play and the way they use real estate will change,” he said. But, “to say that there’s a need for less real estate is almost an argument saying we’re stationary beings.”