Bridgepoint sees real estate opportunity as rates shake out market

Bridgepoint Group sees growing opportunity in overlooked corners of the real estate market as higher interest rates chase less disciplined investors to the sidelines, CNBC reported.

The London-based firm, with $125 billion in assets, has expanded from core private equity and private credit into infrastructure, secondaries, and real estate. This summer it announced the acquisition of Kayne Anderson Real Estate, a real-estate investment firm with over $22 billion in assets. The deal gives Bridgepoint a bigger foothold in the U.S. market and a real-estate platform that CEO Raoul Hughes called “category-killing” in an interview with CNBC’s Inside Alts.

“All the products we have are the go-to products within their niche,” Hughes said. “They’re very entrepreneurial, very alpha-driven and we’re all about real value-added investing. What we didn’t have prior to coming together with Kayne Anderson was the real-estate piece.”

Higher interest rates have created a new headwind for many real-estate funds. Funds that poured money into commercial and residential real estate in 2021, when interest rates were near zero, are now grappling with higher borrowing costs, compressed valuations, slower transaction volumes, and more defaults. The pain is real, but Bridgepoint’s argument is that pain creates opportunity for investors who have capital and discipline, a contrarian stance gaining traction as the rate cycle matures.

Al Rabil, CEO and co-founder of Kayne Anderson Real Estate, said higher rates will lead to a shake-out in the industry. “People say ‘oh interest rates up, real estate bad,’” Rabil said. “It’s actually not quite that simple. Yes, interest rates are up, cap rates up, asset valuations down. But this is a longer duration investment business so it isn’t day-to-day or quarter-to-quarter. When you get in an environment like the one we’re in, it actually produces a very outsized investment opportunity because we’re in very rarified air.”

Rabil cited three sectors as attractive for Bridgepoint and Kayne Anderson. Medical office space is the first. He said the asset class hasn’t been below 90 percent occupancy in over 20 years, with demand far exceeding supply. Kayne Anderson focuses on the higher-margin sub-sectors of oncology, neurology, cardiology, and diagnostics. “People age 65 or over need seven times more doctor visits than those 45 and under,” Rabil said. “So the population has a massive need for increased health care that has to be satisfied through medical office.” The demographic tailwind is independent of interest rates, which makes medical office a rare real-estate bet that does not depend on the Fed.

The second sector is small-bay industrial, or commercial space used by small businesses and e-commerce retailers. “Small businesses are 47 percent of GDP,” Rabil said. The logic is that small businesses need physical space regardless of what interest rates are doing, and the supply of small-bay industrial space has not kept up with demand from e-commerce and last-mile delivery. It is the kind of unglamorous real estate that institutional investors overlooked during the zero-rate era.

The third opportunity is in residential, but not in the way most investors think about it. Rabil said investors poured billions into multi-family real estate in 2021 and 2022, with many of those loans financed with a 10-year Treasury at around 1 percent. “Much of that debt is coming due today,” he said. “There is a huge opportunity for very good assets that are structurally broken, in terms of the capital structure.” The opportunity is not in buying buildings at a discount but in buying the debt on buildings where the borrower cannot refinance. If the building is good but the capital structure is broken, the investor who restructuring the debt can end up owning the asset at a fraction of its replacement cost.

Hughes said higher rates are not likely to impact Bridgepoint’s broader portfolio companies in private credit and private equity. The firm focuses on high-growth, high-margin businesses that are more resilient to interest rate swings. “You’d rather rates were stabilizing where they are rather than going up,” Hughes said. “And I think rates probably are stabilizing. But from an investing perspective, I don’t think it materially damages our ability to drive returns from our equity portfolio.”

What I think

Rabil’s line about “rarified air” is the right frame for the real-estate opportunity. The combination of higher rates, compressed valuations, and maturing debt is creating a wave of distressed real-estate situations that disciplined investors can buy at discounts. This is not a bet that real estate goes up. It is a bet that someone else’s pain becomes your opportunity. Bridgepoint has $125 billion in assets and the Kayne Anderson platform to execute it. That is the kind of capital and expertise that wins in a shake-out.

The medical office thesis is the strongest of the three. The demographic argument is independent of the interest rate cycle. People age 65 and over need seven times more doctor visits than those 45 and under, and the population is aging. That demand has to go somewhere, and medical office space is where it goes. The 90 percent occupancy floor over 20 years, through multiple rate cycles and a pandemic, is the kind of track record that real-estate investors should pay attention to. The focus on oncology, neurology, cardiology, and diagnostics is smart because those specialties generate higher revenue per square foot than general practice.

The multi-family debt opportunity is the most interesting and the hardest to execute. Investors who bought apartment buildings in 2021 with 1 percent financing are facing a refinancing cliff at 5 percent rates. The buildings are fine; the capital structures are broken. The opportunity is in buying the debt at a discount, restructuring the loan, and either taking the building back or earning a high yield while the borrower works through the problem. This is a private credit play as much as a real-estate play, and it requires the kind of distressed debt expertise that most real-estate funds do not have. Bridgepoint’s expansion into private credit is what makes this strategy viable.

Hughes’s claim that rates are “probably stabilizing” is the optimistic case. If the Fed hikes by 50 basis points in December, as some traders are now pricing, rates are not stabilizing and the real-estate shake-out intensifies. More defaults, more distressed sales, more opportunities for Bridgepoint. The worse it gets for the market, the better it gets for disciplined investors with capital. That is the contrarian bet Bridgepoint is making, and it is the right bet for a firm with their resources. The risk is that the shake-out is deeper than expected and even good assets go bad because the economy enters recession. But that is the risk that every contrarian takes.