Sponsored: Sound Point’s Don MacKinnon on the Commercial Real Estate Mortgage Market

Don MacKinnon, portfolio manager of Sound Point Capital Management LP, discusses the commercial mortgage market was historically financed by large institutions until the financial crisis of 2008 changed the dynamic and created a need for private capital.

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Video Transcript

Don MacKinnon   00:00

The commercial mortgage market is a $3 trillion debt market. It’s very large, historically it was financed by large institutions, think big banks big finance companies or big insurance companies. They made loans they collected their interest payments they collected their principal payments. Made a new loan when that money came back, it was not an investment class you heard of. You may have had exposure to it indirectly, if you owned a bank stock or if you owned a life insurance policy part of your income on that investment was driven by commercial real estate. You never had an ability to direct invest because the supply demand was all managed by those large institutions.

Financial crisis in 2008 changed the dynamic. There are three primary things that changed after 2008, number one FDIC risk-based capital guidelines increased. FDIC capital guidelines have implications to the banks in the United States. The banks are stress test every year by the FDIC. Those capital requirements have limited their exposure to commercial real estate relative to where they were prior to the crisis. The second thing, Dodd Frank. Dodd frank was put in place to control systemically risky financial institutions and those were defined as institutions with more than 50 billion of assets. Those certain regulations lead certain institutions to disband their business altogether, others have been limited in what they do. The last thing is the Basel III regulations in Europe, have kept many of the big money center banks in Europe that previously lent on the commercial real estate market in the United States out of the United States.

So, what we have is a $3 trillion market with hundreds of billions of dollars of maturities every year. And we have a huge need from that four capital into this space and we have limited supply from the traditional players that has led to private capital filling that need.

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