Ambitious REIT Launch Targets $1 Billion Raise for Struggling Office Sector 

Amid a turbulent financial climate for office real estate, two investors recognized for capitalizing on market downturns are joining forces to raise $1 billion to extend loans to beleaguered office owners. Their goal is to support office property owners by providing loans amidst a tough lending environment. 

Reven Office REIT, a mortgage-focused real estate investment trust, plans to secure $100 million from a principal investor and an additional $900 million via an innovative “blind pool” initial public offering (IPO). The leadership team will include Chad Carpenter as the CEO and Ethan Penner taking the role of chairman. 

The landscape for office landlords is fraught with challenges as they grapple with increasing borrowing costs and declining property values. This has been exacerbated by tightened credit availability, with numerous banks and alternative lenders stepping back from issuing new office loans due to escalating vacancies and the unpredictability of demand in the wake of flexible work arrangements that have emerged post-pandemic. 

Related reading: Is a recovery incoming for commercial real estate finance in 2024? 

Penner, who played a key role in popularizing commercial mortgage-backed securities, pointed out the severe dislocation within the commercial real estate sector, particularly concerning office spaces. He highlighted that current lenders are extremely hesitant to engage with office properties. 

Bringing over 30 years of experience in real estate investing, Carpenter previously led Reven Housing REIT Inc., which he sold off in 2019 for approximately $57 million. Penner’s claim to fame includes his significant contributions to the expansion of the CMBS market during his tenure at Nomura Securities in the aftermath of the savings and loan crisis. 

According to data from the Mortgage Bankers Association, office landlords are staring down over $200 billion worth of loans set to mature by 2025. The combination of rising interest rates, record vacancies, and plummeting prices has pushed many property owners into arrears. In fact, delinquency rates on office-backed loans surged from 5.1% three months prior to 6.5% at December’s end. 

Carpenter envisions their new lending initiative will target financing close to $2 billion in loans predominantly comprising fixed-rate senior debt. These would be centered on properties being offloaded at significantly reduced prices compared to their pre-pandemic valuations. He explained that a blind pool IPO allows investors early entry into potential investments through more liquid assets compared with nontraded funds. 

Related reading: 5 Key Concerns Shaping the Real Estate Landscape in 2024 

The duo anticipates commencing their loan offerings within just three months’ time. They aim to identify properties capable of turning a profit even against a backdrop of elevated interest rates—although Carpenter cautioned that while interest rates might be peaking cyclically, property values could continue their descent as leases draw closer towards expiration and owners seek fresh financing. 

With such precarious conditions prevailing within real estate markets, Carpenter emphasized that this was not an environment suited for novice borrowers due to substantial risks present. 

Penner remains optimistic about future prospects despite expectations for continued softening demand for offices as lease agreements come up for renewal over time; he believes there will always be some level of necessity for physical workspace which discerning investors could exploit. 

He likened their strategy akin to fearlessly entering burning buildings while others flee—an approach born out of confidence in finding value amid chaos. 

Insights gleaned from linked sources and this Bloomberg report, which you can read, here. 

January 23, 2024