By: Jerry Fennelly, SIOR, President of Fennelly Associates
Over the last four years, the lingering impacts of the COVID-19 pandemic have reshaped the macroeconomic landscape, and the commercial real estate industry has certainly felt the effects.
The resulting freeze in the capital markets over the past two years is among one of the top challenges facing many operators in this space. The murky interest rate environment, rising inflation, and continued national and international supply chain issues will bring further challenges to the capital markets throughout 2024. As a result, the phrase ‘Survive Til ‘25’ has become an often-repeated line throughout the industry.
How Did We Get Here?
Coming off of an extended period of low interest rates, the Federal Reserve raised rates by 400 basis points in 2023. Simultaneously, several high profile bank failures related to commercial real estate lending rankled the banking industry. Stemming from those failures, the Fed also raised the amount of cash banks must keep on-hand forcing most banks to revert to a highly conservative lending approach.
Coupled with a difficult lending environment, inflation, supply chain issues and rising vacancies, office, lab and warehouse sectors have also had a significant impact on pricing across the industry. For several years, investors have had to deal with higher costs in virtually every aspect of their businesses. As a result, at a time when banks are reluctant to lend into office, warehouse and some retail real estate, investors need more capital than ever to achieve their real estate goals.
According to Bisnow, $929B in commercial property loans are set to mature in 2024. How can real estate investors approach the current market and ‘Survive Til ‘25’?
Here are some tips:
- Consider seller financing
- Secure long-term, fixed-rate financing to avoid increased rates during the life of your loan.
- Discuss the potential of an extension with your lenders.
- Explore more creative financing options, such as mezzanine financing.
- Consider alternative lenders and private equity sources as opposed to traditional banks.
- Stay well-informed on interest rate trends and how they impact the market.
What’s Next?
Despite a difficult lending environment, there are reasons to believe that the capital markets are loosening. While interest rates continue to hover around 7%, lenders are now accepting that a higher rate environment will continue for most of 2024 and, possibly into 2025.
Clarity around rates has allowed lenders to better understand the position of the loans on their books right now and accurately underwrite financing for new deals – albeit at a much higher cost. This is far from an ideal situation for those looking to refinance or secure new capital, but it does mean that banks are more comfortable lending than they were a few months ago.
With increased lending, we do expect to see an increase in deal flow over the second half of 2024 as anxious investors get ready to deploy their dry powder and re-enter the markets.
Cautious optimism will be key in navigating a commercial real estate market still facing some headwinds on the horizon. It’s important for investors looking to buy, sell or build to work with experts who are entrenched in the capital markets. These relationships will be vital in ‘surviving’ this year and creating a long-term vision for 2025 and beyond.
For nearly four decades, Fennelly Associates has leveraged our local market expertise to deliver custom commercial real estate solutions for our clients. For more information on how we can help you reach your commercial real estate goals, contact us today.
