This article is the final installment in a four-part series discussing capital markets and lending. The previous articles covered topics such as “Lenders’ Expectations: A Compelling Narrative,” “Understanding Capital Creativity,” and “Capital Markets: Reflections on the Past and Predictions for the Future.”
As we attempt to forecast what lies ahead for our economy, commercial real estate, and capital markets over the next 12 months, it’s important to approach this task with caution. Last year’s focus was on an impending recession that never came to fruition. Other concerns included record-high inflation rates and rising Effective Federal Fund Rates.
However, these fears did not materialize as expected – inflation decreased while the Federal Reserve put a pause on its EFFR rate hike in September of last year.
Despite some missed predictions from 2023, experts are still eager to share their insights about upcoming trends in capital markets with Connect CRE. These include maturing debt obligations, opportunistic investments opportunities,and ongoing restructuring efforts.
One major topic of discussion is maturing debt within banking institutions – specifically office debt maturities followed closely by multifamily properties. T.R Hazelrigg IV from Avatar Financial Group predicts that these maturities will continue putting pressure on commercial real estate throughout this year.
Hazelrigg explains that office spaces will continue facing challenges due to long-term shifts towards remote work environments among corporations while multifamily properties may struggle due an oversupply caused by high levels of financing seen during 2021-2022.
Jeff Salladin from Revere Capital adds another layer of complexity when considering office spaces – what happens if only a small percentage can be converted into multifamily units? This poses questions about how lenders will handle loans based upon steady income streams which have not been realized yet according Ivan Kustic at MetroGroup Realty Finance who states many owners are unable generate enough income needed qualify for new loans even after ten years of principal reductions.
Jonathan Lee from Colliers Structured Finance Group believes that office occupancy has hit its lowest point and while remote work setups are still in place, the lack of camaraderie among employees is taking a toll on companies. He hopes to see an increase in occupancy levels as executives become frustrated with current conditions.
But what about banks? Will they step up their lending game this year? According to Jon Pharris at CapRock, large banks will likely remain cautious and only lend to their most trusted clients. Construction loans may be difficult obtain or come at a high cost for those with strong balance sheets according Pharris.
On the other hand, Gary Bechtel from Red Oak Capital Advisors suggests that lenders may find opportunities offering lower risk and higher returns while buyers could potentially acquire discounted assets which would reset future values going forward.
As experts consider where capital will flow next year, many agree it’s headed towards value-add plays or distressed properties. Jeff Erxleben from Northmarq predicts an increase in lender-controlled sales or recapitalizations as projects funded during 2020-2023 require additional equity and loan restructurings due to financial strains caused by COVID-19 pandemic related issues such as foreclosures creating buying opportunities for investors looking capitalize on market shifts .
Lee also notes potential investment prospects within affordable housing developments – both new construction projects and existing properties offer great potential despite high interest rates . Furthermore , he points out working-class incomes have been negatively impacted by inflation leaving room growth this sector long term .
Kustic reminds us that even though we’re facing uncertain times ahead there is still reason optimism compared previous cycles when values declined 20%-30% coupled with double-digit interest rates . Today’s environment offers more options especially conservative leverage well-managed assets available financing sources
While uncertainty remains prevalent throughout capital markets during these unprecedented times , Bechtel refers industry-wide changes occurring now major reset period winners losers emerge among buyers lenders alike . Lenders may experience losses on their loan portfolios while investors could face challenges as properties change hands. As Bechtel concludes, “We’re living in interesting times.”
