Fall Finance Forum 2024: CRE Set For Capital Boost in 2025

Commercial Observer’s ninth annual Fall Finance Commercial Real Estate Forum on Nov. 20 kicked off the same way and in the same place as it did in 2023, with an opening keynote interview from Blackstone (BX)’s Michael Wiebolt, but with a far different outlook. 

Wiebolt, global co-chief investment officer at Blackstone Real Estate Debt Strategies, reflected that when he first grabbed the mic at The Metropolitan Club of New York during last year’s forum on Nov. 2, 10-year Treasury yields were similar to today, but with many more unknowns in the air. 

“We were just on the very cusp of beginning the recovery from the cycle that was catalyzed by high rates, office challenges, regional bank challenges, and we have sort of moved through that cycle,” said Wiebolt during the discussion moderated by CO Executive Editor Cathy Cunningham. “We are progressing along the recovery.” 

The improved credit conditions in the CRE debt markets have created a far more “robust” deal pipeline for Blackstone, according to Wiebolt, who said it reflects momentum across the industry. Wiebolt noted that commercial mortgage-backed securities (CMBS) volume is on track to end 2024 four times higher than 2023, with private lending also seeing an uptick. 

While Blackstone continues to target largely the growth sectors like digital infrastructure, industrial, multifamily and student housing, Wiebolt stressed that select opportunities are also beginning to open up with office properties as well with particular “green shoots” with the highest quality Class A buildings. Risks still remain for the asset class, but recent CMBS oversubscribed deals on high-profile office buildings demonstrates investor demand in some of these properties, according to Wiebolt — a demand that didn’t exist last year. 

Looking ahead to 2025, Wiebolt projects that interest rates will trend lower if inflation continues its pace of moderate cooling. Whichever direction the Federal Reserve chooses to go, Wiebolt said CRE is in a far better position than in late 2023 due to far less uncertainty with the cutting cycle underway and all-in borrowing costs lower.

Signs of a rebound in CRE transaction activity has been evident at KKR (KKR), which has around a $20 billion U.S. pipeline today compared to what would have been at most between $10 billion and $20 billion a year ago, according to Joel Traut, partner at the global investment firm.

“It’s going to be a multi-speed recovery,” said Traut during the event’s first panel titled “Real Estate Finance Forecast: Lessons Learned from Market Upheaval & 2025 Outlook” and moderated by Jay Neveloff, chair of law firm Kramer Levin’s real estate practice. “We are certainly seeing signs of growth with lots of opportunity, but there’s more to go.” 

Warren de Haan, CEO of Acore Capital, said office getting largely removed from deals has posed a major challenge to achieving high lending levels in recent years, given that the sector accounted for about 30 to 40 percent of a lender’s portfolio in 2019. He noted, though, that the private lender has seen an uptick in transaction activity during the past three months in multifamily and industrial, aided by less aggressiveness from banks  

The first panel also featured Dennis Schuh, chief originations officer at Starwood Property Trust, and Lea Overby, head of U.S. CMBS research at Barclays (BCS).

Schuh said he expects 2025 to produce pre-pandemic levels for lending activity as the investment sales market opens up more from increased opportunities for acquisition loans. Schuh, who estimates that Starwood Property Trust’s debt volume will double next year from its roughly $4 billion of originations in 2024, stressed that now is the time for CRE investors to make moves on attractive deals. 

“If you wait for the all-clear sign, you’ve already really started too late in terms of making a good buy,” he said. “Some people are running out the clock, and they need to liquidate, and at a certain point they’ve sort of given up. So things are starting to happen in that regard, which is creating some transactions.” 

Overby noted that, from an investment standpoint, real estate debt and equity returns at the moment are largely “on top of each other,” making it more attractive for some CRE players to seek out alternative asset classes for returns.. 

A change in federal administrations set to take place when President-Elect Donald Trump takes office Jan. 20 creates opportunities for positive economic fundamentals to CRE if his pro-growth economic policies actually take effect, according to de Haan. He cautioned, though, that there are potential “reinflation” risks from some of Trump’s economic plans and stressed that maintaining an independence between the Fed and the White House is also an important issue the CRE industry will be tracking closely.

Traut said the CRE markets should account for future inflationary pressures if tariffs proposed by Trump during the presidential campaign are enacted.

“If you look at the tariffs that were put in place with China under the first Trump administration and around the world, that is going to have an inflationary aspect to it,” Traut said. “So that just puts more pressure on this view that we could have a higher resting heart rate for inflation and a little bit more pressure on long-term yields.”

The next panel, “Market Distress Giving Way to New Investment Opportunities & Opening Doors for New Entrants,” explored how a number of troubled loans that have been in limbo amid higher interest rates and valuation declines are set to now make their way through the system to generate increased transaction activity. 

Michael Cohen, managing partner at CMBS workout specialist Brighton Capital Advisors, said many borrowers he advises have been unable to make deals work with their lenders, which presents opportunities for other CRE market players to step up. He described CMBS lenders as “pawn shops” with no relationships, which has resulted in many borrowers unable to make deals with their special servicers, who often threaten foreclosure. 

“We have certain borrowers that cash out on their loan finance, there’s certain borrowers that have tax implications that can’t give the keys back, and then we have certain borrowers that are sticking their heads in the sand,” Cohen said. “All these people on the panel around me are perfect because they’re the ones who want to unlock this, fill in the gap equity and fill in the debt in order to make these transactions.”

The second panel— moderated by Ella-Marie Smith, partner at Dechert — featured Tony LaBarbera, managing director at Blackstone; Laura Rapaport, founder and CEO of North Bridge; Adi Chugh, founder and CEO of Tyko Capital; and Maxwell Chu, co-founder and CEO of Fulcrum Lending.

Rapaport said commercial property accessed clean energy (C-PACE) loans, which North Bridge has become a leading lender in, can play a crucial role in filling a capital stack for a number of deals in need of financial assistance.  She noted that C-PACE, in addition to being used for construction or renovations projects, can be utilized to give borrowers or lenders credit for improvements already done with the property, from a three-year look-back from the initial temporary certificate of occupancy (TCO).

“If the TCO was within the last three years, you can get passive liquidity dollars to date that can be used for a myriad of options, including paying down the lender and covering debt service reserves,” Rapaport said. “We can actually be a meaningful part of the stack or that little bit that needs to help get the project back on track and provide time in a way that’s better effective for both the borrower and lender.” 

LaBarbera estimates that 90 percent of loan activity now is from refinancings often in the form of “broken capital structures” with bridge debt to give borrowers more time to ramp up their business plans. He said these types of deals will likely continue into 2025 given the number of looming maturities on loans issued in 2021 and early 2021 at near-zero interest rates. But LaBarbera is hopeful that acquisitions can make up 40 percent of the lending volumes, which would remove the barrier of determining values on past issued debt. 

The next panel, titled “Appetites in a Changing Market: Discussions With Leading Lenders & Investors” — moderated by Mark Fawer, partner at Greenspoon Marder —  focused on the collective appetites of lenders in a changing market, where leading lenders told the audience where they like to play in the current CRE landscape. 

Philip Adkins, head of U.S. real estate debt originations at Barings, emphasized that as multifamily continues to “price to perfection,” his firm has moved toward other asset classes, notably industrial, where it can achieve outsize yields. 

“We’re seeing in your basic warehouse and industrial deals, you’re able to achieve from 25 to 50 basis points spread premium over your traditional multifamily, and, especially [in the industrial space], we really love the cold-storage sector,” said Adkins, who added that that passion goes for both existing and new development. “We’re also dabbling in the industrial outdoor storage sector for the past 12 months. We see that as a very interesting sector and the same place you can achieve 50 to 60 basis points outsize yields [over traditional multifamily].” 

Abbe Franchot Borok, managing director and head of U.S. debt at BGO, admitted that she expects her firm’s capital deployment in 2025 and 2026 to be more diverse than it has been over the last 12 months, when more than 80 percent of BGO’s book was invested into multifamily and industrial. 

“We’re beginning to see opportunities in other asset classes that make sense — whether that’s retail, or cold storage, we like the niche asset classes that are benefiting from demographic or technological tailwinds,” she said. “But it’s hard to not look at residential and industrial space, and see that continue to be an anchor of our portfolio.” 

The conversation then turned to the looming maturity wall of CRE debt that has been forecasted to reach $1 trillion by the end of 2024. Adkins tried to temper fears by noting that there’s been a $300 billion carryover of debt from 2023 into this year, and that if the entire debt origination market is expected to achieve between $500 billion and $600 billion of originations by the end of 2024, that means there will be another $300 billion carried over into next year. 

However, he emphasized that the market is “starting to see more capitulations of more lenders asking borrowers to pay them off,” and that there’s been “an uptick” over the past four to five months of discounted payoffs. 

“The bulk of debt origination is on commercial banks, and so far the regulators have been pretty loose with the banks, so I’d expect them to pick it up next year,” said Adkins. 

Yorick Starr, managing director and investment officer at Invesco Real Estate, echoed this sentiment by noting that more lenders are saying “enough is enough” with “extend and pretend,” mainly because there is sufficient debt capital out there to rightsize many of these underwater whole loans in damaged capital stacks. 

“Maybe it’s not as perfectly priced as it once was, but as the front end of the curve, as SOFR keeps coming down, the floating-rate options out there keep getting more interesting,” said Starr. “That’s an easy way for someone to buy a couple of years and, maybe, reach a better day.”

When asked how borrowers and lenders are navigating these challenges together, Shawn Katz, president of Silverstein Capital Partners, said that it depends on a borrower’s access to new equity, but also on a lender’s willingness to “face reality” and make accommodations to help borrowers through what he called “a very challenging time.” 

“But I’ve been surprised that there’s a lot of lenders just kicking the can, and we’re starting to see that maybe change,” said Katz. “But this grand capitulation of lenders selling loans or private lenders like ourselves taking a large volume back just hasn’t occurred.”

The next panel, titled “Expanding the Lending Landscape: Changing Positions in the Capital Stack to Maximize Returns & Capture Opportunity” — moderated by Krystyna Blakeslee, partner at Gibson, Dunn & Crutcher — featured a discussion on the ever-expanding lender landscape, with debt funds and alternative lenders proliferating amid a large-scale bank pullback, and how that’s changed the way capital stacks are structured and who borrowers are seeking the best loan terms from.

Mark Silverstein, a senior managing director at NewPoint Real Estate Capital, noted that on the multifamily side, the CMBS market is much stronger today than it was even a year ago, and that 2024 has seen a tremendous amount of deal flow, north of $100 billion in that space. He added that on the agency side, Fannie Mae and Freddie Mac are expected to see $140 billion in deal flow in 2024, and will likely match, if not exceed, that volume in 2025.

“That’s been a very aggressive product, and obviously with rates as high as they are lately it’s been harder, but a year ago there was a fair amount of agency lending getting done,” said Silverstein. “And insurance companies in 2024 have been much more aggressive in the first half of the year than they had been in 2023, at least on the fixed-rate side.” 

Jonathan Schwartz, senior managing director and co-head of New York capital markets at Walker & Dunlop, emphasized that there’s been “a significant amount of capital that’s been raised” over the last three to five years by lenders — capital that’s been sitting on the sidelines, “frankly, impatiently, without equity,” and it’s now “burning a hole in their pocket.”

“At the end of the day, there’s a lot of optimism, given there’s a new administration coming in, hopefully the volatility will slow to an extent, and that will give people more confidence to put out more capital in the credit space,” he said, adding that equity needs more capital for originations of new acquisitions, as well.  

Turning to the capital stack, Chris Lawton, managing director and head of originations at Nuveen Green Capital, admitted that with a lot of banks still on the sidelines, his firm is coming in as an A note lender for its most recent deals. 

“We’re replacing the banks by having a high-yield lender behind us, or we’re partnering with a smaller bank almost as a syndicate partner,” he said. “We’re coming in slightly more leveraged in the debt than with a [traditional] bank loan.” 

In a unique twist, the conversation started to focus on the capital stack structure of construction loans, where the self-removal of regional banks from the playing field has made room for private lenders to step in to flex their own expertise for these very specific CRE loans. 

David Friedman, chief credit officer at Arbor, an alternative lender, said that unlike institutional banks, which tapped out at 55 percent to 65 percent loan-to-cost, and by necessity lend on a shorter time horizon, a private lender like his firm takes an extended time frame, rather than a three-year window, on most assets. 

“Our thesis, on a long-term basis, when you push through the supply and look out 36 months, we’re willing to go the extra five or 10 basis point in the leverage,” he said. “We have the built-in exit products with bridge and agency, so we take that long-term view. We can step into that space.” 

Joe Shaley, head of acquisitions at Haven Capital, another alternative lender, said that in 2021 and 2022, his firm was lending in partnership with institutional names familiar to any market participant. But today those household names are now out of the lending space, and it’s opened the door for debt funds to provide liquidity. He echoed Friedman’s views on construction lending as the place where alternative lenders have really found their footing. 

“Half of my multifamily pipeline is development,” he said. “It’s a great product for us, and we work as an A note to a lot of debt funds that can generate yields on returns at proceed levels they probably weren’t able to two or three years ago.”

“I think there’s a fair amount of liquidity in that space,” he added.    

The final panel of the day, titled “Analyzing the Pipeline: The Key Deals, Asset Classes & Opportunities Defining the Year Ahead” — moderated by Aron Zuckerman, partner at Simpson Thacher —  analyzed the pipeline of office loans coming due in 2025. The panel opened with Anita Laljit Lamb, vice president of real estate at Goldman Sachs, noting that the $3.5 billion CMBS refinancing that Tishman Speyer and Henry Crown & Co. secured for Rockefeller Center in New York City is the exact type of office deal that lenders will come to the table to refinance in 2025.

“First, there needs to be a high-quality asset, assets that are highly amenitized, that are located in big cities, near transportation, and that have had recent capex dollars go into them,” she said. “High-quality rent rolls are also a good factor to have. And, on the sponsorship side, we want to see top sponsors who committed to their assets through equity contributions.” 

But it wasn’t long for a discussion about office to zero in on conversions to residential. Ran Elaisaf, founder and managing partner of Northwind Group, said that it typically takes his firm 40 days to underwrite an office-to-residential conversion, and that Northwind’s entire book is only 7 percent office, with only half of that allocated for conversions due to the risk inherent in the redevelopment projects.

“We’ve really shied away from giving construction dollars to conversions,” he said. “We prefer doing the acquisition and predevelopment, which we feel will give us a fallback scenario if it doesn’t work.” 

Doug Hayden, CEO and founder of Arthroto, a conversion specialist, said that his team has identified at least 200 office buildings in New York City that are ripe for conversions. However, he cautioned that municipalities like New York need to “wake up to the [future] loss of tax revenue” from these conversions. 

He also said that, rather than judge buildings by their horizontal floor plates, a smart conversion team will assess potential values for different mixed uses in the same conversion based on vertical floor plates. 

The conversation closed with Eliasaf joking that if he were mayor, he’d rezone the entire Garment District in New York City into Hudson Yards in order to convert more Class B and Class C office buildings into new residential housing through revised upzoning laws and released air rights. 

“What we’re seeing right now is that the city will only add 10,000 units a year where it needs to add 50,000,” Eliasaf said. “We have a mayor and a city council that need to release a lot of the restrictions in order to build at a cheaper cost.” 

“You’ve got my vote,” Hayden quipped. 

Andrew Coen can be reached at acoen@commercialobserver.com and Brian Pascus can be reached at bpascus@commercialobserver.com