Investors with a record hoard of money to finance distressed commercial real estate are finding themselves in a tough spot: There’s nowhere to spend it

The massive wave of defaults expected after the coronavirus shuttered offices, hotels and stores last year has so far failed to materialize. Now, as the U.S. economy swings from pandemic lows to a vaccine- and stimulus-induced rebound, the window of opportunity for discounted deals is closing before it ever really opened.

That may sound like positive news to most Americans, but to a select group of investors who anticipated raking in big profits from the misfortunes of others, it’s a problem. Troubled properties aren’t coming to market because owners have little pressure to sell. Commercial real estate prices have held up — or even risen — because so much money is chasing so few deals.
“We’re starting to see frustration rolling over into desperation,” said Will Sledge, senior managing director in the capital markets unit of brokerage Jones Lang LaSalle Inc. Investors are “willing to push prices up and their yields down in order to simply deploy capital.”
U.S. private equity funds stockpiled more than $250 billion for commercial real estate loans as of March 23, according to Preqin. That included a record $75.8 billion for distressed debt, a figure that grew in response to last year’s eruption of late payments on properties.
Fundraisers continue to rake in commitments. Cerberus Capital Management closed a $2.8 billion opportunistic real estate fund Monday, exceeding an original $2 billion target. Oaktree Capital Management said last week it raised $4.7 billion real estate opportunities fund, surpassing its $3.5 billion goal.
The cash piles may increase even more. Almost 30% of institutional investors are targeting distressed and opportunistic commercial real estate deals this year, nearly double the early 2020 share, according to a new survey by CBRE Group Inc.
With all the capital out there, there’s going to be a bit of a ‘Three Stooges’ effect,” said Jim Costello, senior vice president of real estate data firm Real Capital Analytics. “They’re all running through the door at once but nobody can get through.”