The growing attraction of short-term real estate loans during the pandemic is making it easier to borrow to refurbish properties.

By Matt Phillips

The pandemic forced owners of hotels, malls and office buildings to adjust almost overnight to a harsh reality in which millions of Americans were no longer traveling, shopping at stores or going into offices. It also depressed the vast market where such companies raise money for their commercial real estate projects.

Although there’s still a lot of uncertainty about how the brick-and-mortar economy will operate after a year or more of disruption, investors in commercial real estate are slowly regaining their appetite. Some are hoping to find better returns with interest rates near zero, while others see fresh opportunities generated by the pandemic.

“People who have been kind of sitting on the sidelines are kind of eager to jump back in,” said Catherine Liu, a research associate at Trepp, a firm that tracks data on commercial real estate.

If anything, the uncertainty — despite signs that the pandemic is coming under control as vaccines are rolled out — is drawing investors because they can demand higher yields for taking on risk. So far this year, investors have lapped up a type of short-term complex debt that is a common way for property developers to raise money. Called collateralized loan obligations, these financial securities package together dozens of real estate loans.

Roughly $4 billion of collateralized loan obligations were issued through the middle of February, a 46 percent increase over the same period last year, according to JPMorgan research. At the same time, new issues in the market for commercial mortgage-backed securities — another type of debt, where real estate borrowers lock in longer-term financing — were down about 8 percent.

Stoltz Real Estate Partners, a private equity firm outside Philadelphia, benefited from investor appetite for collateralized loan obligations. It raised around $45 million last month to refurbish Promenade on the Peninsula, an open-air shopping mall near Long Beach, Calif., according to Bloomberg data.

The mall was roughly 20 percent vacant, and its two largest tenants, Regal Cinemas and Equinox Fitness, “have ceased operations and stopped paying rent due to Covid-19,” according to a report last month from Moody’s Investors Service, which rated the financial security. Moody’s said that since getting the loan, the mall’s owners had spent roughly $8 million redeveloping some parts of the property into an office space and renovating lobbies and retail suites to increase the property’s competitiveness.

Investors like Eric Kirsch, the global chief investment officer of the insurance company Aflac, see a more direct path to investing in commercial real estate, especially in projects that typically need short-term financing of around three years. Demand for financing is heating up, Mr. Kirsch and others said, as landlords — in anticipation of permanent changes in the way people work, live and shop — refurbish and upgrade their properties while people are still largely at home.

Mr. Kirsch is betting that in addition to bank loans and securities packaged by Wall Street, landlords will want to borrow directly from a partnership that Aflac’s investment management arm, Aflac Global Investments, is investing in. The company announced on Wednesday that it planned to lend $1.5 billion to fund such projects over the next couple of years in partnership with Sound Point Capital Management.

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Aflac already had a presence in the so-called transitional real estate market, where loans are typically made for a couple of years, but the pandemic presented opportunities to put more money into such lending, Mr. Kirsch said.

“We believe as the vaccine is rolled out and America gets back on its feet the economy will come roaring back and with that is a huge opportunity in the real estate market,” he said.

Stephen Ketchum, the founder and managing partner of Sound Point, said, “The commercial real estate credit market hasn’t been buoyed as much as the corporate credit market.” He added, “When you look at other things that we could invest in, this is extremely attractive on a relative basis.”

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  Mr. Ketchum said he expected the partnership to focus on loans to multifamily housing units and industrial parks. Both types of properties have needed upgrades during the pandemic — especially in smaller cities that have sought more warehousing space as home deliveries become the norm and that have taken in residents moving from bigger cities.

  But property developers of all sorts are looking for financing to help them prepare their buildings for whatever the world looks like once the pandemic subsides.

  L+M Development, which specializes in affordable housing and mixed-use spaces, recently closed on a three-year, $22 million bank loan to finance the renovation of a 140,000-square foot office building just north of Yale University in New Haven, Conn.

  The firm, based in Larchmont, N.Y., bought the building in 2019 in a joint venture with other developers, including Goldman Sachs’s Urban Investment Group. Plans include overhauling lobbies and rooftop amenity spaces, repositioning walls and upgrading heat and air conditioning. L+M expects that the life sciences hub around the university will continue to develop over the longer term, said Jake Pine, the company’s development director.

  Although the project isn’t directly in response to the pandemic, Mr. Pine said he could see the attraction of short-term financing to fix up buildings as vacancies rose during the past year.

  “If you can get a transitional lender that’s willing to take a bit of the risk, stay with you for a two-, three-year period, allow you to kind of come out of Covid, or rebound from Covid, it makes a lot of sense,” Mr. Pine said.

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