Archives for 2024

CRE Braces for 2025 Amid Conflicting Predictions on Market Stability

December 20, 2024 by CARNM

With 2025 less than two weeks away, the pressure’s on for definitive takes on where commercial real estate is going, how long it will take to get there, and who the winners and losers are.

It’s a big ask that probably can’t be granted. There are signs to point at, whether you’re a pessimist or optimist. Maybe what’s needed is a third option of considered planning and flexibility.

Let’s start with pessimism. Bloomberg’s take seems to be doom finally catching up with reality.

“I look at 2025 as a year of reckoning,” Tim Mooney, head of real estate at Värde Partners, which invests in property debt told Bloomberg. “Lenders and borrowers will acknowledge that lower interest rates aren’t going to save them.”

There is certainly ugliness in the market. As they point out, more than 10% of CMBS loans on office buildings are delinquent. A lot of real estate owners have borrowed using short-term debt using interest-only payments with a large balloon payment at the end.

Those who went that route, particularly with adjustable-interest loans that were made within the last few years, are likely feeling the heat. There is only so far that lenders will kick the can down the road and increased borrowing costs lead to lower valuations. Bloomberg pointed to data from MSCI about “an average decline of 23% for offices and 20% for residential buildings since 2022.”

Except that data was from March 2023 and many things have changed. Plus, comparing values from 2022 misses that those numbers were highly inflated because of the flood of capital seeking better returns than fixed-income investments. And CMBS figures are only one part of the CRE capital markets puzzle.

The conclusion is a little too easy. Look at some data from the other side of the fence. Bank loan modifications — the extend-and-pretend practice — were up in the third quarter according to a recent Moody’s report.

They reviewed financial reporting disclosures for US banks that they rate with more than $100 billion in assets and any bank with CRE to tangible common equity above 150%. The data was for the first nine months of 2024 through September 30.

The median percentage of modifications for banks that had between $100 billion and $700 billion in assets was a 61% increase from 120 basis points to 193 basis points. For the largest banks, it was a 14% increase from 69 to 79 basis points. And for the smallest, it was a 217% spike from 10 to 32 basis points. Some noticeable jumps in percentage, but between 1.93% and 0.32% value of total loan values at banks needing modifications. Inconvenient? Sure. Added risk? Yes. On the crest of implosion? No.

Valley National Bank sold almost $1 billion in CRE loans to Brookfield Asset Management but at only a 1.0% discount earlier in the month. That doesn’t seem like a desperate move.

As Nathan Stovall, director of financial institutions research at S&P Global Market Intelligence, told GlobeSt.com early in December, “You’ve had a lot of money raised that banks would purge their portfolios. You’re seeing 5% to 10% of haircuts on overall portfolios and not a lot of those.”

Will some properties and owners need help in 2025? Absolutely. Is that the entire market? Not by a long distance. And much of the bad news is calculated and reported on percentages of total amounts in loans, not on the number of loans or properties themselves. There are likely a lot of possibilities in CRE next year. It’s a time to plan and keep a close eye on economic developments

Source: “CRE Braces for 2025 Amid Conflicting Predictions on Market Stability”

A New Dawn: Seizing Real Estate’s Moment of Opportunity

December 12, 2024 by CARNM

The following 2025 Outlook is from David Steinbach, Global CIO at Hines. The views expressed are the author’s own.

As we enter 2025, we remain amid a massive transition in the investment landscape. Gone is the distant past of low interest rates propelling growth and asset appreciation. In its place is a more challenging environment requiring an increasingly methodical approach. But, we believe a new era of recovery is upon us.

As many central banks have begun cutting interest rates, fundamentals are improving, and global growth is strengthening. Broader themes such as meaningful demographic shifts and the rise of AI are also guiding our increasingly positive investment thesis.

These are reasons that investors should approach the new year with optimism. In fact, it’s our view that we’ll likely look back on 2025 as a pivotal moment of recovery in many areas of the commercial real estate sector. For investors, we believe the time is now to reposition portfolios as the window opens in the year ahead. With that in mind, our high-conviction themes for 2025 include:

Living: An acute housing supply shortage, unprecedented home unaffordability issues and changing demographics have transformed the global living sector. We now see a pronounced proclivity to rent globally, with exciting pockets of opportunity emerging at the macro and local levels.

Retail: After years of turmoil, a transformed retail sector has emerged. Robust wage growth, strong consumer sentiment and stabilizing global inflation indicate that this turnaround should continue. We believe that these realities are converging into a compelling investment thesis.

Industrial: Despite softening fundamentals post-pandemic, the capital markets have remained bullish on the industrial sector. As such, it remains fairly—if not fully—priced. This is particularly true for assets with short-term rollovers of seasoned leases, where buyers can underwrite large NOI gains on expiring leases, given accrued market rent growth. Most markets should experience renewed rent growth as supply and demand come into balance.

Office/Debt and Alternatives: Return-to-work continued to gain traction as the supply of the most desirable office spaces remained limited. In this environment, we see an opportunity for investors to sequence their exposure to office—a process we believe starts with a risk-adjusted approach to tactically leveraging debt. Meanwhile, niche sectors like student housing, self-storage and digital infrastructure/data centers look attractive.

Several significant elections took place globally in 2024, most recently in the United States. With campaigning wrapped up and a new season of governing about to begin, we’re taking stock of the potential impacts of a new administration in Washington. While we remain optimistic in the near term, it remains to be seen what outcomes could result from potentially dramatic shifts in global tariffs, immigration, and broader fiscal policies. Despite this uncertainty, we’re excited about the opportunities we see on the horizon to put fresh capital to work.

The content herein is provided for informational purposes only. Nothing herein constitutes investment, legal, or tax advice or recommendations. This information represents subjective opinions of Hines. Other market participants may reasonably have differing opinions.

Source: A New Dawn: Seizing Real Estate’s Moment of Opportunity

2024 Federal Economic Area Report

December 2, 2024 by CARNM

Read the current Federal Economic Area Report provided by CARNM and RPR. This report offers real estate professionals a window into demographics and consumer behavior in the state of New Mexico.

View the report here.

Interest Rate Trajectory Still Unclear

November 11, 2024 by CARNM

What happens to commercial real estate when interest rates jump up? It’s a trick question — the industry just spent the last two years finding out. Now the Federal Reserve’s Federal Open Market Committee is under a microscope as everyone in CRE scrutinizes every action and statement out of the Fed. So, what will happen?

A Trepp analysis points out with the most obvious, that cuts to the federal funds rate — the range at which banks offer unsecured overnight loans to one another — could possibly pump life back into CRE transaction volumes. But it will take time.

To get an idea of how some factors interplayed in the past, Trepp looked at interest rate cuts after periods of elevated interest rates and compared them to rates of increased transaction volumes, property valuations, and loan originations. They did note that correlations aren’t causations.

After the Global Financial Crisis (GFC), the Fed dramatically cut the federal funds rate. At the time, credit took a beating and liquidity was extremely low. As more liquidity became available, there was an increase in commercial real estate debt and equity investment.

A similar pattern could play out today, with rates coming down from high levels over the last two years, though with a far smaller immediate impact.

Even though the federal funds rate is down by 75 basis points so far, property owners and investors might not see lower rates for some time. Changes need to percolate up, and the cumulative amount of cuts so far isn’t large enough to be compelling for many, as multiple sources over time have told GlobeSt.com.

The Fed could signal further rate cuts to generate a wave of activity over the next few quarters, although that doesn’t seem likely. The central bank has been adamant that it was watching the data and would speed or slow rate changes depending on where conditions moved.

Another potential source of slowing is that CRE is a leveraged asset class. An increased cost of capital slows transactions because the bid-ask gap widens during a price discovery phase and cap rates adjust more slowly.

One place lower rates might become evident is in refinancing. Borrowers who opted for floating rates — without sufficient hedging strategies, to round out the picture — saw the costs climb. The 75-basis-point fall is low in comparison. If rates fall sufficiently, those borrowers might refinance into something more stable and predictable. They also might be able to sell at a higher price than they would otherwise get as the financing becomes more affordable for the buyer. However, many would-be sellers and buyers will likely wait to see if rates fall further.

Interest rate cuts typically increase transaction volume “once transactional cap rates exceed borrowing costs.” Sufficient time must pass — a year or two isn’t uncommon — for markets to adjust to the new rates.

Property valuations also rise after rates fall. The change enables more potential buyers to consider a given investment, increasing competitive demand and property prices, so long as buyers can find a way to their desired returns on investments. Not all sectors may feel the same lift. Lodging and retail are dependent on wider economic conditions and consumer confidence. Office is still under the thumb of changes in where work is done. Again, another source of potential delay.

Similarly, there is generally a delay between rate cuts and volume of loan origination. “Historically, it can take up to 18 months for lower rates to fully translate into higher origination volumes,” Trepp wrote. “This delay occurs as both lenders and borrowers adjust to the new environment and renegotiate loan terms.”

In short, lower rates will help CRE in time and not evenly across all property types.

Source: “Interest Rate Trajectory Still Unclear”