We believe the current commercial real estate (CRE) environment presents attractive opportunities. NorthStar Capital intends to primarily invest in CRE and real estate-related debt, direct investments in CRE properties, indirect investments through private equity funds and joint ventures. While NorthStar Capital may invest in CRE equity, its primary focus is to originate, acquire and manage a diversified portfolio of CRE debt investments.
Skilled CRE lenders, such as NorthStar, may be well positioned to take advantage of the impact of increased regulation to traditional lenders, specifically banks, in the midst of growing demand. NorthStar Capital seeks to capitalize on these dynamics by providing borrowers, operators and partners with a single access point for well-structured debt and equity capital secured by quality assets.
Expanding Investment Landscape
We believe the CRE market remains healthy and current fundamentals support continued opportunities to make debt and equity investments. According to data from Real Capital Analytics, CRE transaction volume has increased steadily since the financial crisis. We anticipate sustained property transaction volume, which may create meaningful new financing and acquisition opportunities.
Pending Maturities Continue to Fuel Demand
We believe CRE loan maturities over the next five years should continue to fuel demand for refinancing capital and provide significant investment opportunities for CRE lenders. On average, approximately $455 billion of CRE debt will mature annually through 2018 (or approximately $1.25 billion a day on average), with approximately $2.07 trillion scheduled to mature through 2020.2
Void of Traditional Lenders
Following the recent economic downturn, traditional lenders face enhanced regulatory challenges, including increased capital requirements, leverage limitations and new risk retention rules. We believe these regulations may further restrict the capabilities of banks and other traditional lenders, likely limiting their participation in the lending and securities markets. As a result, alternative sources of capital like NorthStar Capital may benefit from a reduction in competition and an overall improved pricing structure.
Improving CRE Fundamentals
We believe strong CRE fundamentals may provide additional opportunities for portfolio appreciation and current income by targeting direct and indirect CRE equity investments. NorthStar Capital’s investment strategy will utilize a relative value approach to optimize risk adjusted returns and diversify its portfolio by purchasing properties and borrowing efficiently to finance those acquisitions. As CRE markets continue to improve, we believe direct CRE ownership may complement NorthStar Capital’s CRE debt focused strategy and optimize its ability to generate current income while also participating in potential property value appreciation.
1) Source: Real Capital Analytics, December 31, 2015. Based on independent reports of properties and portfolios $5 million and greater. 2) Source: Barclays Capital, Barclays Capital U.S. Securitization Research: CMBS Outlook 2015; Compiled using data from U.S. Federal Reserve Board, FDIC and Barclays Capital. Total originations data — Commercial Mortgage Bankers Association Annual Origination Volume Summations 2002-2015. Mortgage Bankers Origination Index estimates quarterly origination volume, which was extrapolated against actual historical originations. 3) Source: Commercial Mortgage Bankers Association Annual Origination Volume Summations 2012-2015. 4) Source: NorthStar Management, NCREIF Property Index Trends.