Falling borrowing costs are enticing potential buyers back
Lenders are seeing more interest in deals to offload old deb
By Natalie Wong and John Gittelsohn | September 24, 2024
Buyers and sellers in US commercial real estate are increasingly convinced that the beleaguered market is reaching a bottom.
But the big question remains: At what price will beaten-down offices, apartments and other properties actually change hands?
Signs abound that there will soon be an answer. With prices down 19% from a peak in 2022, the commercial-property market is starting to come to life. In part, that’s because lenders and owners want to cut their losses and make new investments now that the Federal Reserve’s first rate cut in four years is bringing some clarity on where valuations stand.
“There’s going to be definitely more activity in 2025 and it’s going to be a mix of drivers that’s going to lead to significant instability for some, with some significant opportunity for others,” said David Aviram, co-founder of Maverick Real Estate Partners. Struggling properties that took on too much debt at much lower rates will drive many of the transactions, he said.
Sellers have had to offload properties at steep discounts in recent months. Earlier this year, investors agreed to buy a New York City office building at 67% less than its 2018 purchase price. The former Chicago headquarters of Cboe Global Markets Inc. sold this summer for about half of its pre-pandemic value.
Data this year through July underscores just how tough a market it’s been. Transactions were down 5% from a year earlier to $203.8 billion, according to MSCI Inc. But lately, transaction volumes are showing “steady” improvements, the data provider said in a report.
“Yields are higher than they’ve been in over a decade and the fundamentals are pretty strong and improving,” Todd Henderson, head of Americas real estate at DWS, said Tuesday in an interview with Bloomberg Television. “We like the dynamics in the market.”
There’s still a level of uncertainty lingering in the industry, causing some investors to remain cautious about jumping in too early. Property types such as outdated downtown offices were hit particularly hard as remote work weighed on demand from tenants. Exactly how much each property is worth will take some time for buyers and sellers to agree on.
For now, there are signs that more bidders are eyeing property and loan sales. Recently, lender Parkview Financial marketed about $300 million of loans tied to apartments and offices in New York, New Jersey, and Connecticut. Each loan received multiple offers and bids averaged about 95% of face value, according to Chief Executive Officer Paul Rahimian.
More companies are also willing to provide loans. An investor looking to raise $120 million of debt to acquire a portfolio of Florida warehouses received a dozen bids from major banks and insurers, according to Michael Gigliotti, a senior managing director at Jones Lang LaSalle Inc. who’s working on the transaction. Three months ago, that type of deal would have received four to five offers, he said.
“You’re getting the triple whammy: Players, prices and indices are all cooperating,” said Gigliotti. “It feels like there’s been a switch flipped. Everybody seems excited and we’re calling it the beginning of a new liquidity cycle.”
Investment titans are preparing to jump in to provide certain loans at higher interest rates than a few years ago. Fortress Investment Group and Goldman Sachs Group Inc. are seeking to raise money from investors for new real estate investment trusts for commercial property loans. Elliott Investment Management-backed lender Ascent Developer Solutions said loan demand is double what it was just two or three months ago, according to AscentDS’s Chief Executive Officer Robert Wasmund.
In the Trough
The property market was largely frozen since 2022, when the Federal Reserve started hiking its benchmark interest rate to the highest level in more than two decades. Rising borrowing costs caused real estate valuations to plunge, with many buyers and sellers disagreeing over exactly what many properties were worth.
The central bank’s rate cut announced Wednesday is now giving investors more clarity over the future path of interest rates. Richard Barkham, global chief economist and head of Americas research at property broker CBRE Group Inc., said that the Fed will likely cut rates at least 50 more basis points over the rest of this year.
“We’re in the trough and we’re looking forward to the upswing” of the broad market, Barkham said on a call Wednesday, adding that there will likely be varied results for different asset classes. “There’s still a long way to run through this crisis.”
Many deals will likely be driven by some form of distress. While many lenders were willing to extend loans as the market waited for more clarity, their patience is waning. Borrowers who financed everything from offices to apartments at peak values are facing the prospect of major losses as loans mature.
“You want to be able to be an investor as opposed to being captive in a piece of real estate where your losses are already too great,” said Darcy Stacom, a founder of brokerage Stacom CRE.
And investors are lining up more capital to buy properties. This month, Ares Management Corp. closed a $3.3 billion opportunity fund, its largest closed-end real estate fund ever, to invest in distressed real estate.
“The waiting game is over,” said Ran Eliasaf, founder of investment firm Northwind Group. “The pricing discovery phase is over and now there’s a pricing reality.”
Moving On
Liquidity is returning in various ways. Madison Realty Capital secured $2.04 billion in equity commitments for a real estate debt fund. And the commercial mortgage-backed securities market has revved up this year, with new issuance climbing to $92.5 billion this year through July, up 57% compared to the same period in 2023, according to data compiled by Bloomberg.
Until recently, many borrowers sought to extend maturing loans because the cost of borrowing was high and lenders were reluctant to offer new financing. In one sign that more refinancing capital has become available, four borrowers from Parkview repaid loans totaling $52 million in the 30 days through Sept. 15, a notable amount of repayments compared to the past year, according to CEO Rahimian.
“If there’s anything I’m sure of, it’s that we’re at the beginning of a new cycle,” he said.
With the market for offloading old loans opening up, lenders are able to start clearing their books and originate new debt. Rahimian said Parkview is in the process of negotiating closings on its $300 million of loan sales. Once that’s complete, the firm can put the money back into the market and will seek to earn 10% to 12% in the next 12 months between origination fees and interest.
“The sooner you can exit and move on, the better,” said Rahimian, who’s worked in commercial real estate since 1990. “When money comes into my pocket, I need to put it to work.”
By Natalie Wong and John Gittelsohn
— With assistance from Patrick Clark and Abigail Doolittle
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