Why the conviction? The partners believe prolonged uncertainty around interest rates and remote work has thawed the city’s CRE market, presenting discounted opportunities. The fund will target office buildings that require fresh capital to remain competitive or restructured debts due to higher rates and slower rent growth.
RXR and Ares plan to focus on the upper quartile of class-A NYC offices, which offer potential value due to being shunned by lenders and investors. These properties, ranking below the newest and most modern towers but above older offices becoming obsolete, present a unique opportunity for opportunistic investors.
Rising expectations: $117B in commercial mortgages tied to U.S. offices will mature this year, contributing to tons of distressed sales. The tightening in CRE debt availability and the inclination of banks to shed exposure has left office owners with few options for refinancing loans or securing new capital for property improvements.
Capitalizing on conditions: Ares continues to fill gaps left by retreating lenders. Last year, it acquired PacWest Bancorp’s $3.5bn loan portfolio during its liquidity crisis. Now, they are joining forces alongside RXR, seeding the new fund with $500mn and aiming to raise another $500mn.
“We bring capital and operational expertise and an understanding of what’s happening in the leasing market to know where tenants are going,” says RXR CEO Scott Rechler.
This move by RXR and Ares could be a game-changer for New York’s CRE market, signaling a shift in investment strategies post-pandemic.
- As remote work reduces demand for office space and rising rates add to challenges faced by property owners, distressed dealmaking is expected to go up.
- The launch of RXR and Ares Management’s $1B fund highlights the potential for value creation in the upper quartile of the middle class-A office market, mostly overlooked by lenders and investors.