Real Estate Credit: Cutting Through the Noise

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Stewart: Hey, welcome back. We've got a great podcast for you today. I think you're really going to like it. We're talking about real estate credit, the latest on lending markets and opportunities for insurers, and we're joined today by Charlie Rose, who's Managing Director and Global Head of Debt at Invesco Real Estate. Charlie leads the firm's commercial real estate credit lines of business globally. As a managing director, his primary focus is setting strategy, overseeing portfolio management, and leading the firm's credit investing initiatives in the US. Charlie is a member of the North American Credit Investment Committee and the European Credit Investment Committee. You are a product of Stanford and Wharton, two powerhouse schools. Charlie, welcome back to the show.

Charlie: Stewart, thank you so much for having me again. It's a pleasure.

Stewart: This is great. I'm glad you're back. It's going to be fun. We did change our intro question a little bit, just a little, and it goes like this. So where'd you grow up? What was your first concert, and then just talk a little bit about how you got into your seat today.

Charlie: Stewart, I grew up in a very small town that no one has ever heard of called Fall City, Washington. Fall City is probably, with no traffic, about an hour east of Seattle, up in the Cascade foothills. At the time, it had been the inspiration for the Twin Peaks TV series, if you remember that. But Fall City got about twice as much rain every year as Seattle. So pretty rural, quiet, and wet place to grow up, but a lot of good memories with two brothers and a very simple childhood there. 

Stewart: What was your first concert?

Charlie: Oh man. Well, so I'm going to reveal some of my deep secrets.

Stewart: That's what we're trying to do, Charlie. This is the good stuff. This is what people tune in for, this kind of stuff. 

Charlie: When I was in middle school, I suppose it's not all that surprising, I was a pretty geeky kid. I definitely was not one of the cool kids, and my friends and I loved a band that was, I think really targeted at geeky middle school kids, called They Might Be Giants and we went to They Might Be Giants in concert when I was in seventh grade. And man, I thought I was really cool when I did that.

Stewart: Listen, you are, and here's the good news, right? You are in a long line of podcast guests that would also proudly claim being a geek. I'm one of those people, too. Talk a little bit about how you got into the chair, where you are today, just where you started, and how you've gotten here. You've got a really big time seat in a fairly short period of time, so I think it benefits people who are earlier in their careers just understanding what your path was.

Charlie: Well, listen, there are a lot of different ways to achieve success, but I would characterize my path as being a combination of the result of a lot of hard work and a lot of luck. But when I talk to people earlier in their careers about the luck piece of it, luck only benefits you to the extent that you're willing to see those opportunities when they come in front of you and pursue those opportunities when they're made available to you. So I was an English major in undergrad. I had no idea what I wanted to do, and when it came time to start thinking about what to do after undergrad, I went and asked my dad, because I had no money, if he would pay for the LSAT so I could go to law school, and he said no. And so then I really had to figure out what to do, and there was a guy in my neighborhood growing up who drove a Range Rover, and I was really impressed by his Range Rover.

So I asked around, and he was doing something called commercial real estate. I had no idea what that meant, but I started to apply for any job that said commercial real estate and landed in a research role with a UC Berkeley professor who was looking for someone who could write. So really luck, that at the right time there was someone looking for someone who could write in the commercial real estate industry, and I was graduating from Stanford with an English degree.

From there, I worked with a lot of different clients, insurance companies, REITs, investment management firms, private equity firms, banks, and we provided research services to these different participants in the commercial real estate industry. And I realized that I wanted to be doing what our clients were doing. First off, the research guys weren't driving Range Rovers, and I think our clients were driving Range Rovers and they were making decisions. They were putting money at risk, and they were hiring consultants like us. So I decided to go back to business school to pivot within the industry and have been in investment management in various different capacities within the commercial real estate industry ever since.

Stewart: That's super cool. You know what, I can relate to that. I didn't know, had no background. I thought, “Every business has money, so I'll major in finance”, but I can completely and utterly relate to the Range Rover start. It's great to have you back on. It's been a few years, but we stay close. You've had a number of your Invesco colleagues on. Bert Crouch is going to be speaking at our Annual Symposium. And just to re-anchor the audience, can you do a quick refresher on Invesco Real Estate and, more specifically, your global debt platform, and then we'll get into the finer points here quickly.

Charlie: Our private markets business is probably a little bit less understood within the industry, but is a business that's been around for 40 years. And today the real estate part of that private markets business has AUM of right around $87 billion, making us one of the top 15 largest real estate investment managers globally. What does that mean exactly? Historically, most of our clients have been various institutional clients, some insurance, some public pensions, some sovereigns, some foundations and endowments, although that's a smaller portion of our client base. And today, we're increasingly offering these products to the high net worth channel as well. Our credit business is an offshoot of the real estate equity business that's been around for 40 years. So I joined Invesco a little less than nine years ago to take all of the expertise, information, and relationships that we've developed in the real estate equity space and apply that to underwriting and originating loans secured by commercial real estate. Today, our commercial real estate lending business is just around $10 billion of AUM. We originate loans secured by institutional-quality real estate, the type of real estate that we would own on the equity side throughout the United States and on a pan-European basis.

Stewart: That's super helpful. So it's my understanding that Invesco has a strong focus on transitional or bridge lending, and to be honest with you, I mean I would struggle to define that. So what would be helpful, I think, to kick us off, is if you can define the bridge loan market, what are the typical structures to look like in terms of term fixed versus floating borrower types, and other features that make Invesco's approach differentiated?

Charlie: So first off, commercial real estate debt is a $6 trillion asset class in the United States, which makes it the fourth largest fixed income asset class, about 50% larger than the municipal bond market here in the United States. In Europe, it's a little bit smaller, it's about a $2 trillion asset class, but collectively, our universe, our addressable market for our business, is an $8 trillion market. So you have a lot of variety within that market. You have core lending, construction lending, what we characterize as core plus or bridge, all the way up to high yield and distressed lending opportunities. Our bread and butter historically has been, as you mentioned, bridge lending. We focus on the institutional segment of the bridge lending market. We have a motto here: credit over yield. So we're generally trying to originate the highest quality bridge loans in the market. But to your question, what exactly does that mean?

We are first and foremost almost always a floating rate lender, and we are financing business plans, which Jon Gray has characterized as buy, fix, sell business plans. Our borrowers are typically institutional sponsors, just as you would see in some private credit strategies, where you hear folks talking about being sponsor-driven lenders. We are making loans to institutional organizations who look and think, and operate like ourselves. Typically, we are financing that institutional owner's acquisition of a very high-quality property with some disruption in the cash flow at the time of acquisition. So an example of that would be one of our borrowers buying a large multifamily property, call it 300 units, for around $100 million. They may be buying that property shortly after completion of construction. They may be buying that property after there's been some mismanagement of the property, or it may be a property that's 10 or 15 years old and was absolutely class A product when it was built, but is a little bit tired around the edges. And regardless, their business plan is to buy, fix the cashflow, improve and stabilize the cashflow, and then sell to a core buyer. We on that $100 million acquisition would generally provide 65% leverage, so call it a $65 million senior loan with a three-year initial term and then extension options to the extent that their business plan is delayed, giving them a maximum of five years of term under our loan.

Stewart: Very helpful. The next topic for bid is the current macro backdrop. I know you're like me, you're a news junkie, you see all the geopolitical tensions, the tariffs, the elevated rates. Where do you think we are in the real estate credit cycle today? How do you see tariffs and global uncertainty impacting volumes and valuations, and how would you characterize the current spread environment across CRE debt?

Charlie: CRE debt should be, as we apply the strategy, a very defensive low-volatility through cycles strategic investment. So we try to look past the noise in the market, and candidly, we know that we are doing things right when there are periods of volatility, and our investors don't call us. They're focused on other problems or portions of their portfolio that are experiencing volatility. So today, we think that we are probably in the second inning of the commercial real estate credit cycle. I say that because our industry has just gone through a recession. Real estate is generally a levered asset class, and so when the Fed hiked rates, we saw a significant correction in commercial real estate values. Between 2022 and 2023, commercial real estate values dropped on average by 22%. The market has since found a floor, and we've started to see values come off the bottom, but we haven't seen liquidity return in full into the market, which will be necessary for us to see a full recovery in commercial real estate.

From a spread perspective, it has been truly a credit pickers market for the last two years. The banks are roughly 51% of the $6 trillion commercial real estate market, and for the last two years, the banks have pulled back substantially on their participation in the market. And so that's created a supply-demand imbalance between demand for commercial real estate loans and supply from traditional lenders. We've started to see spreads come in this year as the banks have started to reenter the market, but our strategy is still benefiting from those elevated base rates, resulting in what we believe today to be above long-term average yields for commercial real estate debt.

Stewart: That's super helpful, thank you. The office is something that a lot of folks just don't want to talk about on the real estate side, and it's interesting, I think that people get sort of a historic view in their head about a particular asset class, and it doesn't really reflect what's going on right now today. So it would be helpful if you could tell us what the fundamentals really are, how they're shaping up, how does office compares to other sectors, and what do you like and what are you cautious about?

Charlie: Over the last couple of years, our lending activity has been almost exclusively focused on what we call beds and sheds. Multifamily properties, and similar property types that may be student housing or age-restricted 55-plus communities, that's beds. And then on the other hand, sheds would largely be industrial logistics properties with a small allocation to self storage in there. Today, you are starting to see some firming in valuations for other property types and, in fact, a little bit of the exuberance for industrial has come off and the tariff environment has created some additional near-term headwinds for the industrial space. Office was an asset class that experienced a value decline that was really unprecedented both in scale but also pace. Historically, we've seen close to similar valuation issue in regional malls, but that took place over a decade-long environment. The office correction happened very quickly. But as happens with a lot of investible asset classes, the baby was thrown out with the bathwater in office, and we've consistently been seeing a pretty healthy demand and occupancy for the very best office assets.

I sit in Southern California, and I couldn't think of a better example of the bifurcation that we're seeing in the office market than here in Los Angeles. Downtown Los Angeles is littered with effectively zombie buildings that are in some stage of foreclosure, are unable to sign leases, and tenant demand is very weak, leading to very high vacancy. There are a number of reasons for that, but part of it is the office stock is generally older product in that market, whereas Century City on the west side and Newport Coast in Orange County are effectively fully leased markets with record-high rents. And those are some markets that are characterized by the absolute best live, work, play amenities and generally newer office stock that is favored by tenants today. So there is opportunity in office to be certain, but as a lender, the most important thing that we can do is avoid uncertainty and avoid downside risk. And so until this stabilization of values started to firm up, really office had to be off the table for us because there was simply too much uncertainty around the underwriting.

Stewart: That makes sense. So the next talking point we've got here is integrating equity and credit views, and you're a leading global credit shop. Invesco is also, and you mentioned this earlier, a heavyweight in the real estate equity space. How does your team partner with the equity side of the house, and how do you collaborate when it comes to evaluating markets, property types, or individual deals?

Charlie: I mentioned earlier that we follow a credit over yield strategy on the debt side of the business. The other fundamental pillar of our strategy is what we call property first lending. And that means that we're only lending on the type of real estate that we either already own or would own in our equity portfolio. We have a very distinct culture at Invesco where we truly have no stars. It's a collaborative, flat organization where our employees are rewarded for supporting each other and supporting the business broadly. We then layer on accountability for that. So while we have a dedicated credit team that is responsible for managing our proprietary sourcing relationships and ensuring that we offer swift and certain execution for our borrowers. Once they bring an opportunity in-house, their process fundamentally is a partnership with their equity colleagues who provide input on the physical characteristics of the building, the viability of the business plan and the assumptions in the underwriting itself. And then those colleagues who are both asset managers, those folks who are operating buildings in our portfolio today, and acquisitions officers, those hunter-gatherers out there sourcing new equity investments for us, they're expected to speak at our credit committee and be held accountable for their support of the transaction. That has resulted in us having a much tighter filter than many of our peers, and I think is one of the reasons that we've been able to achieve the performance we have historically.

Stewart: That all makes sense. It's interesting, earlier in the call in the podcast, you had said there's about $6 trillion in the US, the size of the market, and it's about $2 trillion in Europe. You've got a mandate that spans both of those markets. What are the similarities and, maybe more importantly, the differences between the US and European CRE markets right now, and are there any relative value insights that you'd share for our insurance audience that's deploying capital globally?

Charlie: We're constructive on both markets, and we are actively lending in both markets. Historically, Europe has been characterized by less transparency in the market, a higher concentration of traditional bank lenders in the market, and materially lower volumes. But you've also historically seen that the lack of transparency has led to wider spreads in the European market. A lot of investors within our stable of investors have been fairly negative on Europe for a number of years, despite what we have been seeing as relatively attractive risk-adjusted returns within the debt portion of the capital stack. Europe has been perceived as being a slow-growth market with declining populations, fundamentally difficult regulatory environments, and, accordingly, a less attractive place for global capital. And there is truth to all of those concerns, but over the last six months, we have seen a notable renewal in interest from global investors in Europe.

Europe is now perceived as a very stable macro economy, an economy that potentially could benefit from some higher-than-historical growth in the coming years, in part because of the remilitarization of those economies. So we're seeing more capital look at Europe, and that has led us, in part, to increase our relative activity in Europe. I mentioned that we're a sponsor-driven lender, so we do tend to follow our top institutional sponsors to where they are more active, and we're seeing a number of the big-name private equity firms buying more real estate in Europe today than they have been in prior years. So Europe is screening very favorable, and yet given the size of the US market, the liquidity of the US market and the transparency of the US market, we don't think Europe will ever surpass the US in terms of the volume of business that we're doing.

Stewart: So now this is the part, Charlie, where we ask you to dust off your crystal ball and look at forward-looking opportunities. Where do you see the most attractive opportunities in real estate debt over the next, call it 12 to 18 months? I've got a couple of fun ones for you on the way out the door, but this is our last business focus here.

Charlie: I'll assure anyone listening to the call that I don't routinely consult my crystal ball to make investment decisions. But as we're looking at the environment today, I think a couple of things are clear to us. One, real estate credit continues to screen very attractive relative to many other investment alternatives. We are often compared to direct corporate lending or traditional private credit and real estate credit, is screening attractive to direct lending today by virtue of the fact that our industry has just gone through its recession, and we haven't seen anywhere close to the inflow of capital into real estate direct lending strategies that you've seen into corporate direct lending strategies. Layer on to that, historically, real estate credit and corporate direct lending had a very low correlation, roughly 0.2 correlation. So real estate credit is a great complement to a direct lending strategy.

We also see real estate credit screening favorably compared to real estate equity in many instances. We are still in a fundamentally elevated base rate environment, and our macro outlook is for relatively slow growth in the near term, which does indicate that potentially you'll see a more muted recovery in the near term for real estate equity than we've seen in some prior cycles. So, if I can deliver to my investor an equity-like return in the debt position of the capital stack as a result of the elevated base rates today, that is very attractive. I think we are going to see a continued increase in our lending activity over the next 18 months. We have fairly ambitious originations targets and you're going to start to see us expand into some of those other property types where you've seen a firming up in valuations, whether that may be other multifamily and industrial property types, or maybe even on a very selective basis, some office or retail investments. You're also going to see us doing more in Europe than we have historically as a result of some of the factors that I previously mentioned.

Stewart: Very cool. It's been a great education on real estate credit. I really appreciate you taking the time. I've got a couple of other ones for you in the way at the door, and one really speaks to the culture. You mentioned culture at Invesco. The question goes, what characteristics are you looking for when you're adding members to your team? It's not what school they go to, not are they Excel wizards, but what characteristics do you think are important when you're adding members to your team?

Charlie: First and foremost, we're fiduciaries. We have to hire individuals with the utmost integrity, and if there's any indication of anything but that utmost integrity, that's going to be a disqualifier. We are a very collaborative team, so we look to hire people who we’ll enjoy working with, but we're also a very hard-charging team with high expectations. So we're looking for folks who have grit, determination, and ambition. Our business is growing, and we're fortunate to be able to offer a lot of opportunities for those people who work hard, but our expectations are going to be very high. And I think one thing that is really fundamental to me, I have come up in this industry being a little bit of an outlier as a gay man in an industry with very few people like me. And so I'm always looking to hire people who have varied backgrounds, varied perspectives, and complementary skillsets. I don't want to hire people who think exactly like me or who have experience exactly like me. I want people who are going to push me, push my assumptions, and help me and our existing team make better investment decisions.

Stewart: Yeah, that's great. I mean, that's a great answer. Alright, last one. Fun. You get to have dinner with up to four people, including yourself, so you can have one, two, or three guests, who would you most like to have dinner with, alive or dead, Charlie Rose?

Charlie: I would first have dinner with my husband's grandmother, who I never met but was so formative in his life and experienced a type of adversity that I could never imagine. I would have dinner with one of my investing heroes, Warren Buffett, and I think I would have dinner with someone who deeply understands the political economy and has been deep in the trenches. So I'm not going to make a political decision. It would be either George Bush or Barack Obama, someone who has sat in those rooms and had those conversations and has an insight into the way that leaders around the world in the political economy are thinking today.

Stewart: That's awesome. Thanks so much. The title of the podcast, Real estate credit: The latest on lending markets and opportunities for insurers. Our subject matter expert has been Charlie Rose, Managing Director and Global Head of Debt at Invesco Real Estate. Charlie, thanks for being on. Thanks for taking the time.

Charlie: Thank you, Stewart. It's been a pleasure.

Stewart: Thanks for listening. If you have ideas for podcast, please shoot me a note at stewart@insurance.com. Please rate us, like us and review us on Apple Podcasts, Spotify, or wherever you listen to your favorite shows. Tune into our new YouTube channel at Insurance AUM Community. We are the home of the world's smartest money at InsuranceAUM.com.

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