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As the CRE space continues to transform, a crucial question regarding the evolution of its financing landscape within the next year takes center stage. Delving into this very topic, our interview with Silvia Lupu, Fund Manager at Jevan Capital, explores the challenges posed by stricter underwriting standards and rising borrowing costs, how to overcome lending limitations, and where to find opportunities in niche sectors.
Q: How do you see the financing landscape evolving for CRE deals over the coming 12 months?
The financing landscape for CRE deals has gone through a transformative period over the last couple of years, with a 64% drop in overall commercial real estate volume year-over-year.
Borrowers are facing challenges due to stricter underwriting and higher credit costs, leading some to retain existing debt, raising concerns about potential distress and a looming liquidity crisis
The Federal Reserve's rate hikes have created challenging conditions for properties with debt coming due, with approximately $2.8 trillion in commercial properties scheduled to mature in the next five years.
Data centers, life sciences, and niche assets like cold storage and student housing are presenting attractive opportunities for the development and acquisition of capital.
Residential, particularly the multifamily sector is expected to thrive due to strong fundamentals, including increased renter demand, growth of long-term renters, and stabilization of rent-term growth.
Sun Belt markets like Texas and Arizona have experienced rapid growth in both jobs and housing, leading to a surge in multifamily construction. Phoenix, in particular, has seen a notable shift in demand for multifamily properties, with developers ramping up new supply to meet the influx of movers into the area. This trend is influenced by factors like affordability compared to coastal markets, tax incentives for investors, and the need for industrial properties due to rising construction costs and land constraints.
Retail is experiencing a revival in 2024 due to factors like post-pandemic consumer spending surge and hybrid work models favoring retail visits. On the other hand, the office sector faces significant challenges with declining sales, but there are pockets of resilience with higher-end office buildings thriving while others struggle.
Investors are monitoring closely the interest rate developments and lending trends for the right moment to deploy their capital that was held on the sideline over the last couple of years.
Q: Do you think that lending restrictions will become more or less challenging through 2024?
The lending restrictions for Real Estate deals are expected to remain challenging through 2024, as the FED is on its mission to bring inflation down back to 2% in 2025.
- Basel III regulations
The proposed Basel III regulations would require banks to maintain more capital to protect against loan losses, potentially crippling property financing. This could lead to a significant increase in capital requirements for banks with $100 billion or more in total assets, affecting their lending capacity and liquidity in the real estate sector.
- Stricter Lending Standards
US banks have been tightening lending standards for commercial construction and land, with about two-thirds of banks reporting stricter standards. This tightening of financial conditions, combined with rising financing costs and falling property prices, is expected to further restrict funding availability for real estate deals.
- Loan Maturities and Defaults
The real estate sector faces challenges with substantial loans maturing in the next few years, making it difficult for borrowers to refinance mortgages due to tightening loan-to-value ratios. Increasing defaults at maturity could particularly impact weaker real estate assets, depending on their quality, type, and location
- Delinquencies and Defaults
Forecasts indicate a doubling of overall U.S. CMBS loan delinquencies from 2.25% in November 2023 to 4.5% in 2024 and 4.9% in 2025, reflecting a deteriorating commercial real estate landscape that could lead to tighter funding conditions and falling property prices.
Q: What are the most promising and innovative sources of alternative financing available for CRE investors today?
Several innovative sources of alternative financing have emerged, offering flexibility and unique advantages to investors. Some of the most promising options available today might be:
- Private Equity and Joint Ventures: They are redefining collaboration in CRE, offering a composite of risk distribution and capital consolidation.
- Real Estate Crowdfunding: Democratizing investment, these platforms are unlocking CRE opportunities for a broader investor base.
- Seller Financing: This approach opens new channels for buyers while providing sellers with an expanded market.
- Mezzanine Financing: Occupying the middle ground between debt and equity, it offers a flexible lifeline to those seeking additional capital.
Q: Why will you be speaking at iGlobal Forum's Real Estate Private Equity Summit in NYC on March 26?
In these challenging times, when market conditions and the banking system are not on our side, active market players must come together to exchange insights and strategies into various investment opportunities amidst dynamic financing conditions.
Join Silvia Lupu at iGlobal Forum's 25th Real Estate Private Equity Summit on March 26th in NYC
The 25th Real Estate Private Equity Summit is specifically designed to help industry leaders identify the best investment strategies and assets in the current climate. This targeted event gathers a highly-curated group of over 200 decision-makers at the most influential real estate private equity firms, institutional investors, lenders, owners, and developers for a full day of networking, idea-sharing, and deal-making.
