Accelerating Debt Investment Opportunity
Market conditions continue to support the thesis for debt investment in the U.S. office sector.
In October 2024, we argued that there was a compelling opportunity to gain exposure to the U.S. office sector through investments offered by the debt portion of the capital stack, focused on assets best positioned to thrive in a work-from-home (WFH) world.
As ongoing market volatility continues in 2025, we believe this tactical opportunity is gaining traction.
That’s happening for three key reasons:
- “Higher for Longer” Interest Rates: There had been expectations of interest rate cuts in 2025, but with stickier-than-expected inflation and a murky economic outlook, many believe that interest rates will remain elevated even in the case of a trade war-induced recession. While debt investing arguably can offer attractive risk-adjusted returns relative to other investment ideas throughout the cycle, all things equal, “higher for longer” generally equates to “higher returns for longer” for debt investors who base their mortgage yields on either short or long-term interest rates. We believe the window for earning peak debt investment returns this cycle has only been extended.
- Positive Momentum in the U.S. Office Sector: Bright spots continue to emerge in the U.S. office sector, including healthier fundamentals, stable (if not improving) pricing, and broadening demand growth into the broader “Class A” segment of the market. On the margin, improving fundamentals typically reduce the risk of future delinquency, and stable pricing lends even more support for a safe equity cushion for the debt holder.
- The Opportunity Set Is Expanding: The U.S. office sector still faces a wall of maturities and a situation where an increasing number of properties are considered distressed. This is forcing owners to make decisions to either sell or accept terms on new debt capital. Those sales necessitate transaction financing, and deciding to hold will likely result in an uptick in refinancings. All this creates potential opportunities for alternative lenders as there are continuing signs that traditional sources of capital remain reluctant to significantly increase their exposure to the U.S. office sector.
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