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: Looking Back and Moving Forward.”
As we attempt to forecast the future of the economy, commercial real estate, and capital markets for the next 12 months, it’s important to approach this task with caution. Last year’s predictions of a recession did not come true, while concerns about high inflation rates were alleviated when they decreased. Additionally, in September 2023, the Federal Reserve paused its rate hike on Effective Federal Fund Rates.
Although our predictions for 2023 may have missed their mark slightly, Connect CRE has consulted experts to gather insights on potential trends in capital markets. These include maturing debt obligations among borrowers seeking opportunities for growth through strategic restructuring.
One trend that stands out is maturing debt within banking institutions – specifically office debt followed closely by multifamily properties according to T.R Hazelrigg IV from Avatar Financial Group who believes these maturities will continue putting pressure on commercial real estate throughout this year.
Hazelrigg explains that office spaces are still struggling due to long-term shifts in corporate work environments while multifamily properties face an oversupply issue caused by significant financing levels seen during 2021-22 periods.
Jeff Salladin from Revere Capital adds another layer of complexity regarding offices stating “If only around ten percent or fifteen percent can be converted into multi-family units then what happens with remaining buildings?” This problem arises because many loans relied heavily upon steady income streams which have not been realized as expected according Ivan Kustic at MetroGroup Realty Finance who notes even after ten years there are still numerous properties unable generate enough income necessary qualify larger loan amounts needed pay off existing debts coming due.”
However Jonathan Lee from Colliers Structured Finance Group offers some hope stating that office occupancy rates have reached their lowest point. While remote work arrangements are still in place, the loss of company culture is taking a toll on businesses. Lee says “I am hopeful 2024 will be the turning point for offices as executives become frustrated with low occupancy levels.”
But what about banks? Will they step up and increase lending activity? Not likely according to Jon Pharris from CapRock who predicts money-centered banks will remain inactive except for their most reliable borrowers while construction loans become harder obtain at higher costs only available strongest applicants strong financial positions.
On the other hand, Gary Bechtel from Red Oak Capital Advisors suggests lenders may see opportunities offering lower risk and higher yields while buyers can take advantage discounted assets reset future value expectations.
Opportunities Ahead
Jeff Erxleben
In terms of potential opportunities, our experts agree that capital may flow towards distressed or value-add investments. Jeff Erxleben from Northmarq anticipates an uptick in lender-controlled sales or recapitalizations this year due to projects funded during 2020-22 requiring additional equity and loan restructuring measures which could lead foreclosures creating buying options.
Lee also highlights affordable housing as a promising sector despite recent media coverage noting there is still significant potential both new developments existing properties especially given current inflationary pressures affecting working-class incomes saying “Affordable housing has received much attention but there remains great opportunity within this market segment.”
Despite high interest rates depressed asset values ongoing post-pandemic uncertainty we can remain optimistic notes Kustic pointing out present conditions not nearly dire past cycles where property values dropped by twenty percent thirty percent coupled with fifteen-percent interest rates adding conservative financing well-managed properties continue attract capital investors confidence providing some stability amidst uncertain times ahead states Bechtel calling it “a major industry reset” where winners losers emerge among buyers lenders alike experiencing losses portfolios change hands concluding “we are living through interesting times.”
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