Higher for longer interest rates and changing market dynamics are doing some damage in the commercial real estate sector, there’s no question about that. But we’ve all been through economic cycles before and know the drill. What’s different this time around is that lenders aren’t foreclosing and they’re not taking title to properties. Instead, they’re more likely to sell the note to an investor.

In the previous two or three stress cycles, the Federal Reserve and banking regulators became very accommodative to help lenders. They either lowered interest rates or they provided regulatory relief to allow lenders to hold onto property. The idea was to avoid a vicious downward cycle and asset repricing, so banks weren’t forced to liquidate assets quickly.

Right now, the Fed’s most important mission is inflation. That’s job one. So, there may be some casualties in the form of distressed real estate but that’s not their priority.

For banks, it’s much more efficient for them to sell a note because they can do that very quickly versus go through the foreclosure process. A foreclosure can be stymied by legal issues, plus by selling the loan instead of acquiring the property, they don’t have to own the physical asset. In many cases selling the note and letting someone else do the dirty work of resolving the asset is preferential for banks.

So, sure, that means there’s definitely an opportunity for investors to step in and acquire the note at a discount. But it’s not without its risks. People talk about earning high returns, but you’re taking a considerable amount of risk when you take on a mortgage for a distressed asset.

If the current owner sees no opportunity to redeem any of the capital they put into it, then are they really taking care of the asset during that period of time? What are you going to get when you don’t know how much you will have to invest? How long is it going to take to put the asset back on its feet?

You need to earn a big return for taking those risks. I think the capital markets are pretty efficient and will recognize value appropriately. And we all know there’s no free lunch, so investors need to do a thorough analysis of every deal.

At Bonaventure, we’re not seeing the valuations yet being compelling enough for that level of risk.

What we are doing, though, is investing capital to help people unlock the trapped equity they have in good assets so they can use it to bolster their bad assets. That’s where we see the opportunity now that benefits everyone, which is real gold to us.