Markets

Market Dislocation Top of Mind – Commercial Observer

As the nation’s leading commercial real estate financiers reunite for CRE Financial Council’At the annual conference in Miami, there are some dark clouds on the horizon for the industry, dominating the South Beach sun.

The CREFC conference, which kicked off with a beach party on Sunday night at Loews Miami Beach Hotel on the beach, returned to more normal conditions after COVID’s Omicron threw its own lightning strike at the 2022 event, resulting in lower attendance and muted festivities.

While there is much excitement this year about a return to the pre-pandemic atmosphere of CREFC, challenging market conditions are top of mind for participants as the industry grapples with unknowns — how much interest rates will rise in 2023 and the future vibrancy of the office sector, to name a couple. Transaction and lending activity has largely been in a holding pattern of late, with some lenders pulling out entirely at the end of 2022 as the market irons out economic question marks.

“The focus of the conference at this point is more about how you address the challenges for the current book and how you protect existing investments,” Bill SextonExecutive Director Trimont Real Estate Advisors, said the Commercial Observer. “There’s also an eye on how we invest in the markets as asset values ​​come back and we start to get some sort of price discovery and we start to close the bid-ask spread, which is pretty wide right now.”

Sexton said there are likely potential lending opportunities in the second half of 2023 for distressed office and retail properties, but at this point “it’s a bit like catching a falling knife.”

Fed Raised interest rates seven times in 2022, bringing the federal funds rate between 4.25 percent and 4.5 percent — the highest level since December 2007, a stark contrast to the near-zero borrowing conditions that existed earlier in the years. Jerome PowellPresident State reservesindicated last month that rates would continue to rise in 2023 in an effort to meet the central bank’s 2 percent inflation target.

Warren de Haanmanaging partner and co-executive director Acore Capitalhe said that the real wild card is how banks will respond to dislocation on the CRE market with increased regulation, which has already led to liquidity problems.

“Now a lot of funds remain on the balance sheet, but loans that should have been refinanced from a maturity perspective are not being refinanced,” de Haan said. “Bank balance sheets are growing.”

Dylan Kanegeneral manager at ColliersThe New York Capital Markets Group said that while activity slowed in late 2022 due to interest rate uncertainty, there is hope that the Federal Reserve is nearing the top of its hawkish strategy to combat inflationary pressures. In response to the market environment, Kane is focusing heavily on construction brokerage in the multifamily and industrial sectors, along with value-added purchase loans that are not as sensitive to current interest rates.

“They’re not going to deliver that finished product for the next 24 months, so today’s prices aren’t really relevant to the success of the project,” Kane said. “It’s really more how you look at it in two years.”

Mark FogelExecutive Director Acres Capital, said that while many lenders are sitting on the sidelines to see where the Fed ends up with interest rates, there are plenty of opportunities for those with capital available to deploy. Acres has recently been particularly active with construction loans for multifamily properties, along with self-storage, hospitality and student housing properties.

“Once the market realizes that the Fed is going to stay steady for a while, you’re going to see activity pick up,” Fogel said. “We just don’t know how bad inflation really is.” We don’t know how much more they have to do to tame it, and it’s really hard to invest in anything until you know that.”

Andrew Coen can be reached at acoen@commercialobserver.com and Emily Fu can be reached at efu@commercialobserver.com.

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