As we dig into the current state of the commercial real estate industry, one cannot help but recall Charles Dickens' famous line, "It was the best of times, it was the worst of times." This quote, written to depict the stark contrasts of the French Revolution, finds a curious parallel in the dynamic landscape of our industry today. We find ourselves at the crossroads of tremendous opportunities - potentially historic - and unprecedented challenges, where the best and worst of times coexist within the commercial real estate ecosystem.

The Fed's campaign of interest rate hikes to stave off inflation, coupled with slowingeconomic growth, has exposed cracks in the commercial real estate industry. As interest rates went up, required yields went up, putting upward pressure on cap rates – capitalization rates – and once that happened, the fallout was lower propertyvalues, which is still ongoing.

Add the collapse of Silicon Valley Bank, the largest banking failure since 2008, the UBS rescue of Credit Suisse, and then First Republic's collapse has some worrying this will put further pressure on the commercial property industry as banks rein in their lending further. A fact noted in the Wall Street Journal's'Where is the U.S. Economy Headed? Follow the Money' article on May 31, "...Lending conditions for companies, consumers and real-estate developers tightened this spring to levels not seen since the height of the Covid pandemic...".

With roughly $1 trillion of commercial real estate debt maturing before the end of 2024, it may expose the industry and push some assets into default; office assets come to mind as the most troubled.

As dire as this seems, the commercial real estate market is not in the same precarious position it was during the Great Financial Crisis. Despite all the media coverage, I would also add that banks are in better shape than they were 15 years ago. Overall, commercial real estate fundamentals remain sound at the asset level. However, while the assets may be performing to its underwriting, the interest costs – double or triple today – weren't considered. Unfortunately, that is the reality for owners and investors of commercial real estate. The era of low-interest rates is over, as we anticipate higher borrowing costs for the foreseeable future.

The commercial real estate industry is navigating through this period of volatility, which is currently creating substantial investment opportunities for us. By identifying mispriced assets, capitalizing on distressed situations, providing capital at higher yields without last-dollar risk and staying attuned to emerging trends, we are well positioned for long-term success and to deliver value to our investors.We are also benefiting from our focus on the hospitality sector, which isn't seeing the level of property value erosion that the other lower cap rate sectors are experiencing. And, when we do make investments into other sectors, we are doing it on our credit side of the house. They are not lacking opportunities in this market. Peachtree continues to be a leading lender in hospitality and, more recently, in other commercial real estate sectors. The credit unit continues to generate equity-like returns at lower leverage points without taking the last-dollar risk. This ideal scenario benefits us, and we expect to see it through the year.

The other opportunities also being driven by liquidity issues – acquiring assets, buying mortgage notes – are emerging with more on the horizon. We have already made a few strategic investments in these areas, with more undoubtedly to come. In this rapidly changing market, our investment teams – debt and equity - are well-positioned to pivot to those opportunities.

I would be remiss not to mention our hotel development program, which continues to excel, with six hotels opening this year alone and a growing pipeline and ongoing groundbreakings. With growing room demand to record levels and limited new supply, we benefit from this persistent industry imbalance.

The hard work of our asset and property management teams should be noted too. They work diligently to protect your invested capital while striving to generate above-market returns in an evolving market characterized by significant challenges and uncertainties. Their expertise, attention to detail and relentless dedication contribute to the long-term success of our investments.

These current and anticipated opportunities will lead to another productive and potentially historic year for Peachtree.