Kyle O'Hehir - The Distressed Real Estate Credit Market

The intersection of distressed debt and real estate reveals uncomfortable truths about how property values really move, truths that assessors need to understand as we navigate an unprecedented shift in commercial real estate markets.

The New Reality of Non-Bank Lending

Kyle O'Hehir's journey from commodities trader to distressed debt investor offers a window into forces reshaping property valuations across the country. His observation about the lending landscape should make every assessor pause: "I have not done a bank deal since Q1 2020. Every deal I have done since then has been with a non-bank lender."

This isn't just Wall Street reshuffling. When Apollo, KKR, and countless smaller funds become the primary lenders in your jurisdiction, the old rules about how distressed properties work through the system change fundamentally. Banks can "pretend and extend" troubled loans almost indefinitely. Non-bank lenders? They answer to limited partners and have credit lines that demand results.

The implication for assessors is stark: the gradual, predictable workout of troubled properties we've seen historically is being replaced by something more volatile.

The Maturity Wall Meets Reality

"The big scary maturity wall thing is overblown," O'Hehir notes, but his next point matters more: "There are definitely going to be opportunities and we're already starting to see them."

What's driving this isn't operational failure, it's math. Properties bought with floating-rate bridge loans in the last 36 months face a cruel arithmetic. As O'Hehir explains, owners have two choices: "Come up with serious cash to do a cash-in refi" or "bite the bullet and write a pretty significant chunk of the equity down."

For assessors, this presents a valuation challenge we haven't faced in decades. How do you value a property that's operationally sound but financially underwater? When the distress is in the capital stack rather than the asset itself, traditional comparable sales analysis becomes treacherous.

The Local Knowledge Advantage

Perhaps the most relevant insight for assessors comes from O'Hehir's screening process. When evaluating distressed debt opportunities, he runs two immediate tests: Is the debt close to what the collateral is worth? And what's the default interest rate?

This mirrors our own challenge in assessment. We must understand not just what properties sold for, but why they sold. A property that trades at 50% of its previous value because of capital structure issues sends very different signals than one that trades at that level due to physical obsolescence.

O'Hehir's emphasis on local knowledge resonates: "If you're an operator in market, I guarantee you there's some big credit player who made a loan in your market. And yes, they would sell it to you at a really good price because they don't know your market like you do."

The Back-Leverage Time Bomb

The most technically complex but crucial dynamic O'Hehir describes involves "back-leverage", when lenders borrow money to lend money. A fund borrows from a bank at 8% to lend at 10%, keeping only 20% of their own capital in the deal.

When these loans go sideways, the fund can't extend indefinitely. Their bank wants repayment. This creates forced selling situations that have nothing to do with property fundamentals and everything to do with financial engineering.

For assessors, these transactions will appear as outliers in our sales data. But are they really outliers, or are they revealing new market realities? This question becomes central to defending assessments in appeals.

Implications for Assessment Practice

As O'Hehir's insights make clear, we're entering a period where understanding capital markets becomes essential to accurate assessment. Properties that appear stable based on income and occupancy may face severe valuation pressures due to financing structures put in place years ago.

His point about opportunities being "very local" while being driven by macro forces captures our challenge perfectly. We must understand global capital markets while maintaining laser focus on local property dynamics.

The shift from bank to non-bank lending, the maturity wall in commercial real estate, and the prevalence of back-leveraged capital structures all point to increased volatility in property values. Our assessment models, built on assumptions of gradual change and rational market behavior, need updating.

Key Takeaway

The distressed debt market O'Hehir describes isn't a sideshow, it's increasingly driving price discovery in commercial real estate markets. As assessors, we must recognize that property values are being shaped as much by capital structure failures as by property fundamentals. Understanding these dynamics isn't optional anymore; it's essential to fulfilling our obligation to maintain fair and uniform assessments in an era of financial engineering and non-traditional lending. The question isn't whether these forces will impact your jurisdiction's values, it's whether you'll see them coming.