This article is the final installment in a four-part series on capital markets and lending. Previous articles covered topics such as “Lenders’ Expectations: The Importance of a Compelling Narrative,” “Understanding Capital Creativity,” and “The State of Capital Markets: A Look Back and Ahead.”
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 about an impending recession did not come to fruition, while concerns over record-high inflation were tempered by a pause in rate hikes by the Federal Reserve.
Despite some missed projections for 2023, experts are still weighing in on trends that may impact capital markets going forward. These include maturing debt obligations, opportunistic investments opportunities,and ongoing restructuring efforts.
One major concern among industry professionals is how maturing debt will affect banking institutions. Office properties are particularly vulnerable at this time due to long-term shifts in corporate work environments. Similarly,multifamily properties may also struggle with oversupply resulting from high levels of financing seen in recent years.
Another issue facing office buildings is their potential conversion into multifamily units; only around 10-15% can be realistically converted accordingto Revere Capital’s Jeff Salladin . This raises questions about what will happen with remaining office spaces if they cannot be repurposed.
In addition to these challenges faced by borrowers seeking refinancing options,the current economic climate has also impacted banks’ willingness to lend money.Construction loans have become more difficult and expensive for even strong borrowerswith solid balance sheets,says CapRock Partner Jon Pharris .
However,this uncertain market presents opportunities as well.Gary Bechtel ,of Red Oak Capital Advisors,predicts that lenders across all sectors could benefit from lower risk exposureand higher rates or yields.Additionally,buyers may find discounted assets availablefor purchase,reducing their future costs.
Experts also anticipate an increase in value-add and distressed investment opportunities. Northmarq’s Jeff Erxleben foresees more lender-controlled sales or recapitalizations,while Colliers’ Jonathan Lee sees potential in affordable housing development and existing assets.
Despite the challenges of high interest rates,depressed values,and lingering uncertainty from the pandemic,Ivan Kustic with MetroGroup Realty Finance remains optimistic.He notes that current conditions are not as dire as past cycles when property values declined by 20-30%and interest rates reached 15%.There is still capital available for well-managed properties with conservative leverage,says Kustic .
As we navigate this unpredictable market,Gary Bechtel describes it as a “major reset” for the industry.There will undoubtedly be winners and losers among buyers,lenders,and investors.However,in these interesting times,it’s important to remain cautiously optimistic about what lies ahead.
