This episode covers the alternative lending market in real estate, where private lenders fill gaps banks left. The guest, Josh Zegen, says the biggest opportunity now is providing leverage to other private credit firms, not direct lending. He notes interest rate volatility hurts more than rate levels, and office problems may take 2-4 years to resolve. Key holdings: Madison Realty Capital (his firm, managing $21B), St. Regis Residences Boston (a loan case where borrower repaid partially), Simon Properties (A-malls strong, B/C weak; he lost money on it in 2007).
The guest on this episode is Josh Zegen, co-founder of Madison Realty Capital, who has over 20 years of experience in commercial real estate alternative lending. The main narrative explores how the commercial real estate lending market evolved from a niche "hard money lending" field in 2004 into a mature asset class managing over $21 billion in assets, while dissecting the current market dynamics and opportunities following interest rate volatility and the banking crisis. The most significant judgment in the entire episode is that the biggest opportunity in the current market is not direct lending, but providing leveraged financing to other private credit firms, filling the gap left by banks exiting due to liquidity mismatches.
Josh Zegen believes that the evolution of Madison Realty Capital is a history of the private credit market itself. Founded in 2004, when the term "private credit" did not yet exist, its core business was filling gaps that banks were unwilling or unable to address, such as "hard money loans" requiring quick closings. The 2008 Global Financial Crisis was a watershed moment, as increased regulation forced banks to significantly retrench, especially in high-risk construction loans and value-add lending. This created a massive structural opportunity for private credit.
Josh Zegen emphasizes that risk management is not just pre-lending due diligence but active management throughout the entire loan lifecycle. This requires the capability to handle various contingencies, including taking over and restructuring assets.
Josh Zegen believes the biggest opportunity in the current market is providing leverage to the private credit industry, while the biggest challenges are interest rate volatility and the stalemate in the office market. The 2023 banking crisis exacerbated liquidity mismatches, forcing banks out of the loan financing market, creating a new business line for firms like Madison.
| Position | Guest's Stance | Key Data |
|---|---|---|
| St. Regis Residences (Boston) | Case Study | Initial loan was ~$350 million. After the borrower paid it down to $200 million, Madison provided a $180 million A-note to a new lender. |
| Las Vegas Class A Multifamily | Case Study | Purchased in 2021 for $120 million, with a loan of ~$87 million. The loan was acquired for $85 million, and Madison provided $60 million in distressed loan financing to the acquirer. |
| Simon Properties | Risk Warning | As an analogy, its A-mall properties perform strongly, but B/C-mall properties underperform. Madison suffered losses on a third-tier Simon mall deal in Dallas in 2007, staying out of the sector for 20 years. |
| Blackstone / Hilton | Positive Case | Acquired in 2007. Navigated the financial crisis through capital flexibility (buying its own debt), ultimately becoming one of the most successful transactions ever. |
1. The next wave of opportunity in private credit is "lending to lenders." (Josh Zegen) — Banks exiting the loan financing market due to liquidity mismatches create a massive opportunity for private credit firms to provide leveraged financing to other private credit funds. Madison already manages ~$10 billion in credit facilities for this purpose.
2. The volatility of interest rates is more damaging than the level of rates. (Josh Zegen) — When the 10-year Treasury yield fluctuates wildly between 3.5% and 5%, investors cannot properly price or finance assets, freezing the market. A stable rate environment (e.g., a 50-basis-point range) is key to restoring transaction volume.
3. The stalemate in the office market is the biggest impediment to current capital flows. (Josh Zegen) — The lack of liquidity in office assets traps significant capital in the sector, preventing its reallocation to other opportunities. This problem may take 2-4 years to resolve, partly through "office-to-residential" conversions.
4. Customization is the core moat of private credit. (Josh Zegen) — 95% of private credit firms do homogeneous "bridge loans." The real premium is earned on more complex construction loans and value-add loans requiring deep servicing capabilities. Madison's vertical integration is its competitive advantage.
5. "Office-to-residential" conversion is one way to address the office glut, but not a panacea. (Josh Zegen) — Not all office buildings are suitable for conversion (e.g., due to size, fire safety), and conversion costs can be prohibitive. Tax abatements offered by New York City are a step in the right direction, but actual progress is limited.
6. Retail has recovered from the pandemic, driven primarily by rising online customer acquisition costs. (Josh Zegen) — As online customer acquisition becomes expensive, foot traffic returns to physical stores. Retail has recovered through rent adjustments, and shopping centers in prime locations are performing well.
7. In a crisis, having "capital flexibility" is the key to winning. (Josh Zegen) — Using the Blackstone/Hilton acquisition as an example, during the financial crisis, they used other funds to buy their own debt, ultimately turning a deal nearly written down by 70% into one of the most successful ever. This demonstrates the importance of having multiple tools and flexible capital.
8. Distressed loan acquisition requires a deep understanding of different state laws and real estate documents. (Josh Zegen) — Acquiring loans is entirely different from originating them. It requires assessing real estate value, defects in loan documents, and varying foreclosure timelines across states (e.g., 3 years in New York vs. 60 days in Texas), creating a significant expertise barrier.