Is a recovery incoming for commercial real estate finance in 2024? 

The commercial real estate finance sector glimpsed a ray of hope late in 2023, potentially signaling a turnaround from a period overshadowed by market uncertainties and soaring interest rates. The Federal Reserve’s signal that its aggressive inflation-fighting tactics may have reached their peak , with rate reductions potentially on the horizon for 2024, injected a dose of optimism into the market. 

This pivot by the Fed followed a series of interest rate hikes that saw short-term rates reach their highest mark in over two decades. However, projections now suggest a gradual easing to more favorable levels by 2026. This anticipation of lowered rates was greeted with relief by lenders and borrowers alike, setting the stage for an improved lending climate. 

Prior to the end of Q4, there were indications of this positive shift. The CMBS market experienced some respite as Treasury yields declined. Barclays reported an uptick in activity during December due to borrowers seizing opportunities presented by the shifting rate environment—activity which was further bolstered following the Fed’s announcement. 

Barclays’ Steven Caldwell observed that this turn of events could mean an earlier than expected resurgence in origination volume for the upcoming year. He pointed out that not only are expectations of lower interest rates stirring optimism but also the clearing of backlogs in conduit loans is enhancing liquidity within projects. 

The bank has been instrumental in introducing five-year fixed-rate conduit pools which have been crucial for properties under short-term ownership. Despite projections of decreasing rates, such products remain appealing due to high costs associated with floating-rate deals tied to SOFR. 

In addition to conduit loans gaining traction, single-asset single-borrower deals are poised to become more prominent given greater clarity on interest rates. Barclays has noted increased activity within industrial and data center refinancing transactions, despite observing a reduction in average deal size compared to four years prior. 

Check out these potential hidden gems in a challenging commercial real estate market. 

As we look towards 2024, one uncertainty remains whether banks will re-enter the lending arena robustly after taking a cautious stance throughout much of 2023. Regional banks had stepped up as larger banks withdrew amid rising rates; however, they too faced challenges following banking crises early last year. 

Valley National Bank’s Chris Coiley highlighted that while stability in interest rates post-Fed meeting is promising for deal-making, regional banks are expected to pursue a conservative approach focused on serving existing clients amidst persistent external cost pressures facing property owners. 

Banks continue stress testing loan portfolios against various economic conditions while attempting to manage CRE exposure effectively—a prudent step as larger financial institutions work on balance sheet fortification and regulatory compliance issues. Meanwhile, debt funds may capitalize on these circumstances by providing essential capital injections for property owners next year. 

Acore Capital’s Warren de Haan anticipates significant opportunities for alternative lenders due both to acquisitions and imminent loan maturities—with nearly $1 trillion worth maturing by year-end—which could mark an extended period ripe for lending ventures. 

Despite these optimistic forecasts, industry experts like Lument’s Jim Flynn caution that any increase in lending volumes will likely be gradual. Nonetheless, certain sectors such as multifamily housing could witness more dynamic movements based on seller intentions identified through recent surveys indicating potential market activity shifts. 

Overall, while it seems clear that commercial real estate financing is heading towards brighter days ahead, stakeholders should prepare for a steady rather than explosive recovery trajectory as they navigate through 2024’s evolving landscape. 

Still wondering what we might see in 2024? Read about the 5 Key Concerns Shaping the Real Estate Landscape in 2024 from the Finance Lobby CRE Insights Blog. 

January 9, 2024