During ReDeal’s 2024 Conference in New Jersey this spring, I joined other experts for an engaging panel session titled “Navigating the New Normal: Unlocking Opportunities in a Shifting Debt Landscape.” During the discussion, several trends and strategies emerged that could prove helpful for borrowers looking for solutions as they survey today’s multifamily and commercial real estate (CRE) landscape.
1. CRE is adapting to changing market dynamics. The landscape for commercial real estate (CRE) has evolved significantly over the past decade, sparked by changing market dynamics. For example, the boom in e-commerce substantially increased demand for warehouses, distribution centers, and other industrial spaces. The shift to remote work, on the other hand, reduced demand for both downtown offices and for the retail spaces that cater to commuting workers. In Manhattan, office occupancy is still only about 75% of pre-pandemic levels; in some other business districts, office occupancy is even lower.
2. CRE is adapting to changing regulatory dynamics. A growing number of jurisdictions are adopting sustainability-focused regulation targeted at commercial real estate. New York City’s “Local Law 97,” for instance, sets carbon-emission caps for buildings larger than 25,000 square feet. The law has spurred developers in the Big Apple to use greener building technologies; it has also forced existing owners to retrofit buildings to meet the new standards. Likewise, many jurisdictions are revising their zoning laws to create more affordable housing. Incentives for developers include things like zoning bonuses and reduced parking requirements.
3. CRE lending is evolving, too. Many traditional banks have been slow to adapt to changing market and regulatory dynamics. Those that have fared better have largely done so by gravitating toward more specialized lending for, say, residential projects, as well as by pivoting to more “dynamic” financing solutions, such as rehabilitation and bridge loans that cater to multifamily and mixed-use developments. Meanwhile, more non-bank financial institutions are stepping up to fill the gaps left by traditional banks. For the former, this has often meant offering bridge loans—ranging anywhere from $15 million to $500 million—for large-scale developments. Partly as a result, these non-traditional lenders have emerged as pivotal financiers of major commercial real estate deals. And many of these lenders now also operate nationwide.
4. CRE activity is increasing in certain sectors. After a slowdown at the end of last year, CRE activity picked up in the first quarter of 2024 in certain sectors, such as retail, industrial, and multifamily. Negotiations, closings, last-minute restructurings, and the purchase of distressed loans all saw a surge over the past several months. Despite the challenges of the pandemic and the changing market dynamics discussed above, retail’s resilience is visible in its vacancy rate, which recently hit a 10-year low. As for multifamily, the sector continues to benefit from higher mortgage rates, which are encouraging people to delay home purchases in favor of renting.
5. CRE investors should study economic data extra closely. CRE benefited from a long period of extremely low—and mostly stable—interest rates. As interest rates rose, CRE developers and investors had little choice but to become nimbler and more selective. Today, they must contend with huge uncertainty over the direction of future interest rates. Investors therefore need to pay even more attention to the many macroeconomic indicators that influence the Federal Reserve’s interest-rate policy. Top of mind should still be the lagging indicators of inflation (especially the Consumer Price Index and the Producer Price Index), GDP, and unemployment. But leading indicators (such as building permits, unemployment claims, the yield curve, inventory levels, and consumer confidence) merit closer scrutiny, too.
Contact the author to learn more about effective financings options in today’s market.
