An era of higher interest rates stands to wreak havoc in portions of commercial real estate, said Josh Friedman, the co-founder and co-CEO of alternative-asset manager Canyon Partners.

“In the beginning of any downturn, the first things that comes to light are the worst problems,” he said on the sidelines of the Milken Institute Global Conference in Beverly Hills. “There’s going to be carnage in some parts of the commercial real estate business.”

Companies — and especially portions of commercial real estate — are struggling to maintain their balance sheets amid the Federal Reserve’s aggressive monetary tightening. The difference is that most corporate issuers will be able to muddle through, Friedman said during an interview with Bloomberg Television. 

The quality of the real estate assets vary, he said, and there’s been a flight to safer segments — especially with some lower quality offices “worth less than the ground it’s built on.” 

Recent turmoil at regional banks, which offered financing to commercial real estate firms, is compounding the stress. A pullback in lending from those banks, however, should open new opportunities for private lenders as leveraged properties stare down refinancing deadlines, he said. 

“These gaps will cause new players to fill those holes,” Friedman said. “Part of it is because the commercial banking system won’t fill those holes.”