00:00 Speaker A

The Federal Reserve is not expected to cut interest rates until September, but what is that going to mean for rate sensitive industries like real estate? Our next guest says private capital and private credit are filling the gap left as banks continue to remain on the sidelines. Joining us now in studio, Richard Lin. He is Harbor Group International’s president with $19 billion in assets under management. Richard, it’s great to speak with you. Talk to me here about where you are seeing private capital coming in and bridging lending gaps in this environment.

00:34 Richard Lin

Yeah, it’s an, it’s a very important topic in the real estate industry, and as you alluded to, commercial banks have retrenched on on real estate. Um, so private lenders are are very supportive of the industry, and there’s a lot of capital around private real estate credit. I would say it’s focused, as you might expect, on product types with very strong fundamentals, like multifamily, for example, could be very different for office. Uh, multifamily also benefits, obviously, from uh, Freddie Mac and Fannie Mae who who provide very important debt liquidity to the apartment sector.

01:26 Speaker A

Since you bring it up, I have to ask Fannie Mae and Freddie Mac going public. What is your take?

01:35 Richard Lin

Right. Well, it’s been discussed before. It’s not a new topic. It it tends to be discussed more frequently in Republican administrations over time. I think the important thing is is what the president said yesterday, separate and apart from whether it goes public, how it goes public, is the government guarantee, the implicit government guarantee behind behind those financing sources for the housing market. Particularly important in the single family market, which is the vast majority of Freddie Mac and Fannie Mae’s business. You pull back the implicit government guarantee, uh, it’s only going to elevate rates. So I think they’ll be very cognizant of that, uh, particularly given how high interest rates already are for for home buyers.

02:44 Speaker A

Well, and that brings me back to the private lending conversation, and the part of that is a lack of transparency that is baked into how private lending works. Is that something that consumers should be concerned about?

03:08 Richard Lin

Well, you know, in our business, uh, you know, at Harbor Group, we’re lending to sophisticated counterparties that are also sophisticated investors. So I would say that is a, you know, that is a transparent process, certainly to the extent, you know, private debt firms like like ours are, you know, accumulating loans going to the securitization market there. You know, there are a lot of bond buyers looking at a lot of data, you know, and making their own, you know, making their own risk assessments. So I think, you know, in the, in the commercial real estate sector within private debt, certainly, we certainly feel good about overall market transparency.

04:11 Speaker B

One question I get all the time is every every new asset class, every new financial innovation gets its real world test. Yeah. Some, some pass, some don’t. Right. Has private credit had its real world test yet? And if so, if not, I should say, what how do you think it fares, and where do you think the risks are within that that sector?

05:00 Richard Lin

Yeah, I mean, we are, we are still in a period where there have been a lot of tests. Um, you know, if you look many, many private lenders in commercial real estate loan on a floating rate. And, and so loans made in 2020, 21, early 22, when SOFR was 25, 30 basis points. So now SOFR, you know, in the fours, it got in the fives, debt matured, interest rate hedges, caps burned off. It’s put a lot of pressure on borrowers and lenders. Uh, it’s meant that lenders have had to at times take back assets, or if they feel good about the the borrower’s ability to to recapitalize, they work with them. So we are very much in a testing period, uh, now in this elevated rate environment, and thank in our industry, asset management, uh, experience in real estate has been so important to work through some of the issues private lenders have.

06:17 Speaker A

And we came into your segment also talking a little bit about the moves that we’re seeing in the bond market, and Steve asked a great question about how much yield investors are going to require to own on the longer end of the yield curve. How are you thinking about the bond market’s impact on your business?

06:41 Richard Lin

Yeah, well, in our credit business, you know, the elevated index treasuries for fixed rate credit investments, SOFR for floating rate. That’s, you know, you start out the gate with a nice spread, uh, or a nice return, and then it’s what spread can you, um, put on top of that. So we see very good income generation opportunities in private real estate credit. The last guest talked about the importance of income though, and also risk. So where are you in the capital stack? How low are your LTVs? What are the underlying fundamentals of the of the properties? You know, that that helps you formulate your risk assessment as you think about returns. And I think there’s a lot of we’re back, uh, a number of partners and myself just back from meetings last week in in Japan and South Korea. A lot of institutional investor support for US private credit, particularly multifamily, because the the fundamentals are so strong at the property level.

07:50 Speaker A

Interesting time to be in Japan amid those bond market auctions, too. Richard, thank you so much for joining us in studio this morning. Yes. Yeah. Yeah. It’s a pleasure. Yeah. Thank you for having me. Thank you so much.