Walker & Dunlop Investment Partners Outlines 2026 CRE Risks

Walker & Dunlop’s top commercial real estate investment experts opened up on the risks facing the CRE financial system this week, primarily the multifamily market, whose 2019-to-2022 vintage has failed to generate returns for investors and has hurt sponsors and lenders alike. 

On Wednesday, the Walker & Dunlop Investment Partners team hosted a virtual roundtable led by Marcus Duley, the firm’s chief investment officer; Brian Cornell, managing director and equity portfolio manager; and Geoff Smith, senior managing director and group head of debt.

Duley began by giving a high-level overview of the multifamily market, where he emphasized how different the 2019 through 2022 marketplace was compared to today, as back then, transactions were driven by low interest rates, cheap capital, low cap rates, and high valuations. 

Duley noted that investors in that vintage had outlooks for strong rent growth and buyers were underwriting positive appreciations, while a huge wave of construction starts entered the pipeline, creating what he called “a very very frothy time, where every deal seemed to work against the backdrop of that expectation of cheap capital and high market rents lasting forever.” 

Fast forward to today, and Duley noted how everything is different: interest rates are higher, debt is more expensive, cap rates are higher, values have fallen relative to the same net-operating income, and rent growth is muted, and even negative in some markets. 

“Right now, the market hasn’t stopped, but it’s more disciplined in today’s environment,” he added. 

Duley closed his remarks by pointing out that many construction loans made in the first half of the decade have come due under the shadow of properties that are no longer stabilized and aren’t hitting the rents they were underwritten at — mainly due to slow leasing or valuations sinking below the cost basis.   

“It’s really creating demand for bridge financing,” he said. “Developers simply need more time, and that’s where real estate private credit multifamily will stand out.” 

Private credit dominated the next section of conversation, as Smith argued that corporate private credit and real estate-secured private credit are two very different beasts, with the former being much more dependent on earnings stability and the ultimate enterprise valuations for underlying businesses than real estate private credit that is secured by actual bricks and mortar. 

“There’s concern that the distress in corporate credit markets will come fast and come hard,” he said. “In a recessionary period of time, real estate mortgages are secured by hard assets, and those hard assets don’t go anywhere, so the intrinsic value of commercial real estate is significantly-based on those tangible assets.”

“Property values might go up or down, but overall you’re not losing that anchor in your valuation,” he added.

Duley jumped in and reminded the panel that secured CRE credit carries the ability of lenders to foreclose and take back the keys, a luxury private corporate credit doesn’t have. 

“Because of leverage points, you can still realize your principal back by forcing a foreclosure and ultimately a sale,” he said. 

Cornell, who specialties in equity portfolio management, spoke of the problems in the equity fund world for real estate investors. He cited a recent Preqin Database study that reported the performance of all real estate funds — more than 200 funds with a value of $200 billion in invested capital — and did not sugarcoat the problems occurring in that space. 

“One of the most telling data points from this set of information is that fund investors are not getting their money back at a historic level,” he said. “That’s really shocking. It’s really low for CORE and it’s really across all strategies.”

He noted that for 2019 through 2021 vintage funds, distributions on paid investment (DPI) — in other words, the proportion of investor capital that has been received as distributions — currently has a medium DPI of only 15 percent. He added that fund managers have been hurt by the rise in interest rates, which has made it difficult to create liquidity for investors.

“It’s impacting sales volume, it’s impacting capital flows, and it will really influence pension funds, consultants, endowments on where they put capital,” he said. “Because, ultimately, you need to provide some reasonable level of liquidity in any cycle.”

The panel closed with some thoughts on the main risks threatening the market going forward, where Duley spoke of broader macroeconomic uncertainty being the concern that keeps him up at night. 

“We got here as a result of major macro changes and that possibility still holds true in today’s geopolitical environment,” he said. “I don’t know where interest rates are going, or the results of the war, there’s a lot of uncertainty and I always worry about what I don’t know — the black swan events.” 

Smith spoke of Dodd-Frank, the GFC-era financial legislation that sought to regulate bank capital levels and risk management but unintentionally created the ground for a growth in private credit and now a system where there’s simply too much capital being originated and leant out into CRE deals. 

“It allowed for the proliferation and expansion of private credit fund managers … to the point that I am concerned that — without there being a pullback in the near term — our supply of capital will wreak havoc,” he said. “A financially engineered economic recession is my concern.”

Brian Pascus can be reached at bpascus@commercialobserver.com.