Seeking Financial Solutions, Stakeholders Address Mounting Commercial Lending Downturn

Industry Leaders Convene in New York To Navigate a Market Paralyzed by ‘Hesitation and Uncertainty’

The growing commercial lending downturn is attracting attention from both industry participants and in the broader media narrative. According to a recent article from CoStar, the deceleration in lending and transactions following ten interest rate hikes since March 2022 by the U.S. central bank has left the commercial real estate industry on a quest for financial insights, particularly concerning the heavily impacted office sector.

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All eyes on the CRE Finance Council

The CRE Finance Council’s annual mid-year conference in New York City in early June provided a much-needed platform for executives to evaluate industry issues, such as imminent loan maturities. Many discussions at the Marriott Marquis hotel in Manhattan were packed to the brim.

A recurrent discussion at the event centered around the effect of lenders and investors becoming more hesitant to fund, actions that negatively impact loan origination and transaction volume. This is especially pertinent to office properties, a type of real estate severely impacted by the prolonged return rate initiated by the pandemic.

Simultaneously, accurately assessing a property’s value to warrant financing or investment has grown increasingly challenging. Without dependable market valuation figures, lenders, buyers, and sellers’ expectations widen, causing transactions to stall. Increased capital costs aren’t the only stressor on commercial properties, as rising expenses like insurance also diminish cash flow.

“An atmosphere of inertia and uncertainty prevails,” said Bill Gallagher, managing director at M3 Partners, a financial advisory firm, in an interview. “General lending in the real estate markets has decreased, but it’s noticeably more severe in the office sector. High-interest rates make it difficult for properties to secure loans, leading to significant market dislocation. The office sector, with problems on both the asset and debt sides, faces greater difficulties. The market is challenging… and the situation is likely to deteriorate before it improves.”

M3 assists distressed firms in reorganizing and has participated in commercial real estate financial restructuring cases, added Gallagher.

See how San Francisco’s commercial property sector is dealing with rising defaults.

Anticipated Refinancing Challenges

Moody’s Analytics revealed in a study last month that almost $1.4 trillion of commercial mortgages are expected to mature in 2023 and 2024, highlighting a major problem that could accelerate the current commercial real estate lending downturn.

Only 30% of $1.15 billion in fixed-rate office loans on the commercial mortgage-backed securities market maturing through April this year were settled, according to the sister company to ratings agency Moody’s Investors Service. They also noted that more than 60% of the remaining $7.8 billion in maturities due in 2023 might encounter refinancing difficulties.

“The forthcoming maturities wall in commercial mortgage loans is well-known among market participants,” Moody’s reported. “This situation, combined with rising interest rates, lending capacity issues, and tightening credit conditions, creates significant obstacles. Additionally, the office sector is grappling with existential questions concerning its long-term utility and tenant demand. The office sector is shrouded in uncertainty.”

On Wednesday, the Federal Reserve’s decision to temporarily halt interest rate increases provided some relief to investors.

The failures of regional banks such as Silicon Valley Bank and Signature Bank, which were pivotal lenders for the commercial real estate sector, have exacerbated the challenges facing the industry. However, this has also created room for alternative financing sources like private debt funds seeking opportunities.

Conference attendees, mirroring comments from other venues, stated that office and other properties in attractive markets, with desirable amenities and features, have no issues obtaining financing.

Why did commercial property sales in Houston tumble 74% in early 2023? Find out.

Lending Experiences ‘Significant Change’

“The capital sources are currently undergoing a significant transformation,” said Brian McCracken, co-founder and CEO of North Shore Systems, a commercial real estate finance software provider that counts real estate services and investment firm CBRE and mortgage giant Freddie Mac among its clients. 

He goes on to remark:

“Due to bank failures, everyone is becoming very conservative. Private debt funds are stepping up to fill the gap. Private investors, including private equity and family offices, are pooling resources into a fund to invest in commercial real estate debt and equity.”

Indeed, private equity behemoth Blackstone Group, known as the world’s largest commercial property owner, has highlighted real estate lending as a potential growth area.

Blackstone executives announced in April their plan to collaborate with regional banks, which have seen deposit outflows following the Signature Bank and Silicon Valley Bank fallout, to provide loans for uses such as auto financing and home improvement.

New commercial real estate loan originations have dropped by 25% to 30%, while loans sent to special servicing have climbed to 6% to 7%, compared to 0% to 1% “in a typical year in a robust economy,” McCracken told CoStar News, referencing data from their system.

“It may not sound like much,” McCracken, who co-founded North Shore in 2000, noted. “It’s quite significant… There’s a large wave of loans due for refinancing, coinciding with rising rates and increased valuation difficulties. That’s why the worry is so intense.”

The commercial real estate lending downturn presents a challenging landscape for industry stakeholders. However, it’s through navigating these complex conditions that innovative strategies and financial solutions can emerge. Understanding the market’s shifts, addressing the pressing issues around loan maturities and restructuring, and focusing on resilience will be key in managing this downturn. The industry’s capacity to adapt to these difficult times will not only test its strength but also shape the future of commercial real estate lending.

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June 18, 2023