Commercial Real Estate Pros On the Finance Market: ‘Not a Typical Cycle’

“We’re flush with capital and want to put it out,” he said. “Sometimes, where we want to put it and where the borrower wants it is not the same. But, we’re a little bit agnostic in that we just need trades to happen.

“For two years, I’ve been saying the issue in the lending business is we need to further acquiesce to the fact that interest rates are where they are,” Fineman added. “Interest rates impact value, and when a buyer and seller — or a borrower and lender — agree on what the value is, then a trade can happen.”

Fineman said 2023 was a dead year, and that financiers who are being honest will say volume was down anywhere from 50 to 80 percent from average. But he says he’s seen activity pick up in the first quarter, and expects market improvements the rest of the year.

“I’m optimistic that at some point there will be a catalyst for trades, and that the market will settle on a level,” Fineman said, referring to asset values. “I don’t know that the market has shown us where values are yet. It feels to me like we still need to get to the place where the bid-ask makes sense based on wherever the cost of capital is today.”

Sondra Wenger, senior managing director and head of commercial real estate for the Americas at CBRE Investment Management, said it’s important to be able to pivot and respond to market trends and research. For example, she pointed to work from home trends resulting in far less frequent trips to central business districts for errands or lunch. Instead, people are visiting neighborhood retail centers at far greater rates than before the pandemic.

“If you look at that from a high level, there is limited supply, they have high occupancies, and there’s a lot of under-market rents making it a really attractive investment today,” Wenger said of neighborhood retail properties. “Because retail was in the doghouse for the last nine to 10 years, there wasn’t a lot of construction getting done. So the supply did not keep up with the demand. It didn’t even keep up with population growth.” 

She said, despite negative sentiment, CBRE has seen the highest occupancy levels in retail in the last 24 years, and retailers are seeing higher consumer spending sales per square foot when compared to recent averages.

“We expect that trend to continue on for the next three to four years,” she said. “If you look at pre-pandemic levels, they’ve seen sales increase 33 percent. Because rents were not moving up due to people’s fear of retail, there’s a real mark to market growth in your rental rate. … It’s also unique in that you can get positive leverage today on most of your retail deals.”

Mark Roberts, managing director of research at Crow Holdings Capital and also at SMU Cox Folsom Institute for Real Estate, said while it’s not a typical cycle, there is a lot to be optimistic about. He said investors are responding to the state of money markets by rebalancing their portfolios to reduce exposure in the stock market and target assets with good yield.

When it comes to U.S. office real estate, Wenger said the market tells a bifurcating story between the haves and have nots. 

“It’s a very different animal,” she said. “We need to split it up and call them separate things because the halves are faring very differently than the have nots. And there is a much wider spread in that bid-ask for the have nots versus the haves.”

She said the haves in the office market are actually seeing rent growth and some of the lower vacancies. 

“We’re seeing a huge trend where tenants are now using this as an opportunity to say, ‘We want to get into some good space where we can really pull our tenant pool and our workforce in,’” Wenger said. “We do that through an office that’s the right product, in the right location with the right user experience.”

Roberts said it’s a tenants’ market, which means it’s going to take a lot more capital to develop those types of office amenities. “Part of the challenge is that not all landlords are well capitalized to do it,” he said.

Wenger added that funding is the first thing office tenants ask about when touring properties.

“It’s not ‘Where’s the metro line?’ or ‘What amenities does this building have?’” she said. “We’re now getting asked, ‘What is the capital stack of this building?’ because it’s very important for tenants to know if they’re going to make a commitment that it’s not going to turn into a zombie building.”

Opinions from the panel about multifamily investment were varied. They agreed, though, that multifamily operation fundamentals are strong.

“Most of the properties you see that are distressed aren’t distressed because the occupancy is not there,” Jay Porterfield, executive director at PGIM Real Estate and another panelist, said. “They’re distressed because of the financial engineering that went into the capital stack. My living is made around apartments, so maybe I’m biased, but I continue to be bullish on apartments. But you have to pay the right price.”

Wenger said CBRE was expecting distress in the multifamily market because of the volume of deals completed in 2021 and 2022 at very low cap rates. “But the reality is, there just isn’t yet because it is a long-term investment asset class,” she said.

Fineman cautioned that the nation isn’t out of the woods when it comes to distress in the multifamily market.

“If the [U.S. 10-year treasury] stays at 3.5 to 4 percent, distress in multifamily is coming up,” he said. “There will be capital that’s dejected by the current owner, or capital dejected by the next owner. I think there’s tremendous opportunity and we’re very bullish on putting money out in the multifamily market. But to say we’re past seeing distress in multifamily is not correct.”

Colin Fitzgibbons, president at Hunt Realty Investments, said he’s bullish on multifamily, and the company is working on affordable and workforce housing projects. He pointed to Downtown Dallas’ deficit in affordable housing.

“It is a problem and it’s going to affect the overall growth if we don’t figure out a way to address it,” he said. “So I’m someone who spends a lot of time trying to wrap my mind around how the numbers work, but we’re very bullish on the long-term prospects.”

Carmical wrapped the panel by asking for bold predictions for 2024. 

“I don’t think the Fed moves [interest rates], and I think the treasury stays where it is right now,” Porterfield said. Fineman predicted one rate cut this year “right before the election.”

Roberts’ forecast shows a lower chance of cap rates rising then falling over the next couple of years. Wenger said there will be an undersupply in “brand-new responsive office space in 2025.” And Fitzgibbons predicted “more new office development than you think.”

Gregory Cornfield can be reached at gcornfield@commercialobserver.com.