In this special pre-summit interview, Bonnie shares candid insights on:
The current economic environment has created a volatile market within commercial real estate. According to numbers put out by Newmark as of the end of Q2, CRE debt origination volumes have declined 52% year-over-year, and the current market has 32% fewer lenders. Higher rates, and uncertainty around when rates may stop rising, have led to a mismatch in expectations between investors and lenders in many instances, resulting in fewer transactions even when there is capital to deploy.
This environment requires investors to be strategic. Lenders are tightening structures in many instances and there is a flight to quality assets owned by high-quality sponsors and lower leveraged debt. Of course, CRE is multifaceted: There are MSAs that have seen significant employment growth from the pre-COVID peak and, at a national level, the multifamily and industrial sectors continue performing well. So, there are opportunities for those with a targeted approach.
What are the greatest challenges to securing capital for CRE investments now compared to pre-pandemic, and what should investors know about overcoming them?
There are obvious challenges in the banking industry, but given that there are more than 4,000 banks, generalizations don’t get you very far. Investors should be ready for a longer process; credit committees are tougher. Additional business touchpoints help – lenders are attaching weight to the overall relationship context around a transaction. And cultivating multiple lender relationships is probably always a good idea.
Which CRE sectors are the best bets for investment at this time, and are any sectors stronger bets for solid investment than they might currently seem?
It really is a tale of two markets. If you have a low-leveraged data center, for example, or a high-quality industrial property to finance at a low LTV, there is financing available. While financing is hard to come by for Class B office buildings in certain sectors, the sector does have bright spots. Newer Class A buildings such as One Vanderbilt, which is commanding high rents and showing relatively high occupancies in a desirable market, are performing well.
Private equity sources that have raised significant dry powder are expected to continue to invest in multifamily and industrial properties. One area that has seen a bounce back from the pandemic is the hospitality sector, and that should be interesting to watch over the coming year or two.
What do you think the lending environment will look like over the next 2-3 years?
I think it is going to be a rocky ride. Private lenders will continue to step in to fill certain gaps left by banks, especially at the regional bank level. The upcoming “wall of maturities” on mortgage loans will require significant repricing of assets and lead to both an uptick in loan refinance/origination and distressed asset work. This will also create opportunities for investors to acquire properties and loans at discounted rates, particularly in strong markets where properties have sound fundamentals. As rates start to stabilize and expectations start to line up between financing sources and investors, the market will start to open up and valuations will start to become more clear.
Taking a longer look into history, we’ve seen out-of-favor sectors go through a downcycle and then emerge stronger. We’ve been through this with lodging and retail in the past two decades, and we’ll get there with the office. The real estate markets have always been resilient and will find a way to adapt to the current conditions.