Oaktree Capital Warns: Commercial Real Estate is the Most Acute Area of Risk Now

In a recent advisory note, Oaktree Capital, a distressed-debt firm, has issued a warning, stating that commercial real estate poses the most acute area of risk in the current market. Co-CEOs Armen Panossian and Bob O’Leary assert that a significant amount of debt is nearing maturity, creating a potential crisis. They see a $13 trillion market that will be ripe for investment opportunities, particularly in high-yield bonds, BBB-rated bonds, leveraged loans, and private credit. However, they highlight commercial real estate as the most vulnerable sector due to the impending maturity wall. Over $1 trillion of commercial real estate loans are set to come due in 2024 and 2025, presenting challenges for borrowers seeking to refinance. The firm plans to utilize strategies implemented during the global financial crisis by acquiring loan portfolios and participating in credit-risk transfer deals to help reduce exposure for lenders. Additionally, Oaktree identifies potential opportunities in private credit and high-yield and leveraged loans. Concerns are also raised about the Treasury market, given the U.S. budget deficit and the potential limitations for foreign buyers. As the market awaits potential risks, Oaktree Capital positions itself to navigate and capitalize on the evolving landscape in commercial real estate and other credit markets.

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Oaktree Capital Warns: Commercial Real Estate is the Most Acute Area of Risk Now

Oaktree Capital, a distressed-debt firm, has recently issued a warning regarding the commercial real estate market, stating that it is currently the most acute area of risk. The firm’s co-CEOs, Armen Panossian and Bob O’Leary, have expressed their perspective on credit opportunities and highlighted the size of the commercial real estate market. They have also discussed the maturity wall and the impact of Treasury yield on commercial real estate. Additionally, they have addressed the capital needs in the office property market and Oaktree’s plan to acquire portfolios of commercial real estate loans. The firm has also identified opportunities in private credit, high-yield bonds, and leveraged loans. Furthermore, concerns about the treasury market and the stock market reaction to the warning will be explored.

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Overview of Oaktree Capital’s Warning

Oaktree Capital’s co-CEOs have issued a warning regarding commercial real estate, stating that it is currently the most acute area of risk. They have identified a mountain of debt that is coming due, which presents a significant challenge to the market. This warning is based on their assessment of the credit opportunities that are unfolding, which they believe are the largest since the global financial crisis.

The Co-CEOs’ Perspective on Credit Opportunities

Armen Panossian, head of performing credit, and Bob O’Leary, portfolio manager for global opportunities, believe that there are significant credit opportunities in the market. They have identified a $13 trillion market that will be ripe for the picking. They have highlighted four areas in particular: high-yield bonds, BBB-rated bonds, leveraged loans, and private credit. These areas have grown substantially since the 2007-2008 global financial crisis and present attractive opportunities for investors.

The Size of the Commercial Real Estate Market

The co-CEOs have emphasized the size of the commercial real estate market, which is a significant factor in their warning. They have highlighted the fact that more than $1 trillion of commercial real estate loans are set to come due in 2024 and 2025, according to the Mortgage Bankers Association. This presents a significant challenge for borrowers who may struggle to refinance their loans.

The Maturity Wall and Debt Coming Due

The maturity wall refers to the large amount of debt that is coming due in the commercial real estate market. Oaktree Capital’s co-CEOs have stated that the maturity wall is already upon us and will continue for several years. This poses a significant risk to the market, as borrowers may struggle to refinance their loans, leading to potential defaults.

The Impact of Treasury Yield on Commercial Real Estate

The co-CEOs have also discussed the impact of Treasury yield on commercial real estate. They have highlighted the recent retreat in the benchmark 10-year Treasury yield, which provides some relief to borrowers. However, they believe that many borrowers will still struggle to refinance their loans, especially in the office property market where vacancies are high and rental growth has not materialized.

Capital Needs in the Office Property Market

There is a significant need for capital in the office property market, according to Oaktree Capital’s co-CEOs. They have highlighted the challenges faced by office property owners, including high vacancies, lack of rental growth, and increased borrowing rates. They believe that capital may not be readily available for certain types of office properties, posing a risk to the market.

Oaktree’s Plan to Acquire Portfolios of Commercial Real-Estate Loans

In response to the challenges in the commercial real estate market, Oaktree Capital plans to dust off its playbook from the financial crisis and acquire portfolios of commercial real estate loans from banks. This strategy proved successful during the financial crisis, and Oaktree aims to replicate that success in the current market environment. Additionally, the firm plans to participate in “credit-risk transfer” deals that help lenders reduce their exposure.

Opportunities in Private Credit, High-Yield Bonds, and Leveraged Loans

Oaktree Capital sees significant opportunities in private credit, high-yield bonds, and leveraged loans. They believe that several hundred companies that have issued such debt will be able to weather potential defaults and remain financially stable. This presents attractive investment opportunities for Oaktree and other investors.

Concerns about the Treasury Market

Another area of concern for Oaktree Capital is the Treasury market. They are particularly worried about the trajectory of the 10-year Treasury yield. Factors such as the U.S. budget deficit, the deluge of supply, and the potential decrease in foreign buyers’ demand all contribute to their concerns. Oaktree Capital will closely monitor the Treasury market and its potential impact on the broader financial landscape.

Stock Market Reaction to the Warning

The stock market reacted to Oaktree Capital’s warning, with U.S. stocks falling after the release of strong retail sales data for December. Despite the positive economic data, investors’ concerns about the commercial real estate market outweighed the positive news. Oaktree’s warning has sparked a discussion about the state of the market and the potential risks it poses to the broader economy.

In conclusion, Oaktree Capital has issued a warning about the commercial real estate market, stating that it is currently the most acute area of risk. The firm’s co-CEOs have highlighted the challenges posed by the maturity wall and the significant amount of debt coming due. They have also discussed the impact of Treasury yield on commercial real estate and the capital needs in the office property market. Oaktree Capital has outlined its plan to acquire portfolios of commercial real estate loans and identified opportunities in private credit, high-yield bonds, and leveraged loans. The firm also has concerns about the Treasury market and the reaction of the stock market to the warning.