(Bloomberg) -- Shadow lending firms are preparing to push into commercial property financing as regional banks — wounded from the blowup of Silicon Valley Bank — beat a retreat. 

Among the possible entry points are office properties, especially if values continue falling and banks look to offload the loans. With few buyers willing to wade into those murky waters, lenders with the capital and knowhow may find bargains.  

Banks will need to set aside more capital as office values fall, which means they may look to sell them, said Michael Nierenberg, chief executive officer of Rithm Capital Corp., a manager of real estate assets and investments. “This will create opportunities for players in the real estate private credit space.” 

Offices account for as much as a quarter of the more than $10 trillion commercial real estate market, putting them at the center of the market’s challenges, according to a note this week by Tracy Chen, a portfolio manager at Brandywine Global Investment Management. 

Offices also comprise a big part of the $1.5 trillion in commercial real estate debt that’s due for repayment by 2025. Nearly a quarter of mortgages on office buildings need to be refinanced just this year, according to Mortgage Bankers Association data. 

Even so, distress isn’t permeating the office sector, at least not yet. Default rates for offices remain below those of the retail and hotel sectors, according to a Morningstar review earlier this week of loans tied to commercial mortgage bonds. That’s partly because the impact of falling valuations and lower office occupancy takes time to work its way through the system. 

One early indicator of what may be coming: of the office loans inside CMBS that matured during the first quarter, only 71% paid at maturity, down sharply from the 95% and 85%, respectively, reported for 2021 and 2022 maturities, according to a note this week by strategists at Barclays Plc. 

If and when distress rises and banks or other lenders begin looking for buyers, private credit is likely to be standing by, said Stav Gaon, head of securitized products research at Academy Securities Inc. They possess the capital as well as the sophistication to spot value in a part of the commercial market that’s widely spurned. 

“Sophisticated real estate and private equity investors are well positioned to sift through the commercial real estate universe to identify the attractive opportunities – the office buildings that could be redeveloped, the conversion candidates, the lost causes to avoid,” said Gaon. 

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Spread Change

Relative Value

CLO AAAs look cheap versus against two-year US Treasuries, writes Barclays strategist Keyur Vyas in a note dated April 10

  • “With about 5.6% all-in yields, CLO AAAs continue to look attractive at current valuations; however, we prefer shorter-duration paper, which is less exposed to rates volatility,” Vyas wrote
    • Yields on AAA CLOs have stayed the same at about 5.6% so far this year, while yields on two-year Treasuries have fallen from 4.2% to 4%

Quotable 

“Given the staggered maturity wall, increased distressed supply is likely to play out over multiple years rather than all at once, creating a prolonged opportunity,” according to a note by hedge fund Ellington Management Group

What’s Next 

A long line-up of ABS are on deck for next week, including a number of auto deals. Prime auto ABS are expected from CarMax and Nissan, while subprime deals are expected from DriveTime and First Help Financial. And a fleet lease deal is expected from Element Fleet Management. 

--With assistance from Charles Williams.

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