In this episode of Peachtree's Point of View, Greg Friedman welcomes David Bitner, Global Head of Research and Executive Managing Director at Newmark, for an in-depth discussion on the commercial real estate landscape. They cover key economic and market trends, including the impact of sustained higher interest rates, the evolving debt market, and investment opportunities in a rapidly shifting environment. A major theme of the discussion is how higher interest rates continue to reshape commercial real estate valuations.
Commercial real estate investors and operators are facing a fundamental shift in market dynamics, with the era of ultra-low interest rates firmly in the rearview mirror. In a revealing conversation with Greg Friedman, David Bitner, Global Head of Research at Newmark, emphasizes that this change isn't temporary – it's a permanent feature of the investment landscape that requires a complete recalibration of expectations and strategies.
Looking ahead this year, Bitner anticipates continued volatility in interest rates, with the 10-year Treasury likely to run between 3.8% and the mid-5% range. This volatility, coupled with ongoing economic uncertainty, will significantly impact transaction activity and asset valuations across all property types.
Despite these challenges, there are bright spots emerging. Office markets showed their first positive net absorption in 18 quarters during Q4 2023, suggesting a potential turning point. The industrial sector is poised for recovery, particularly in secondary and tertiary markets, driven by near shoring trends and over $530 billion in planned manufacturing investments. Multifamily properties, especially new construction, show attractive pricing dynamics relative to existing stock.
For investors looking to deploy capital, David suggests a balanced approach with a significant allocation to debt investments, where spreads appear more attractive than equity returns. He particularly highlights opportunities in direct lending and mezzanine debt, where returns can reach 14%. On the equity side, he points to value-add opportunities in trophy office conversions, though emphasizing the critical importance of submarket selection.
The wall of debt maturities remains a significant concern, with approximately $2 trillion in commercial real estate loans maturing over the next couple of years. While banks have largely employed an "extend and pretend" strategy thus far, David suggests regulatory pressure and dwindling extension options could force more resolutions in 2025, leading to increased transaction activity and price discovery.
The podcast also touches on potential policy impacts from the new administration, including proposed tariffs and deregulation efforts, which could create both challenges and opportunities for commercial real estate markets.
For investors and operators in commercial real estate, 2025 promises to be a year of continued adaptation to new market realities. Success will require embracing volatility, adjusting return expectations, and taking amore targeted approach to investments across both debt and equity opportunities.
Peachtree Point of View explores today’s complex investment landscape, offering expert insights and actionable strategies to navigate dislocated markets and capitalize on mispriced risk. Each episode dives deep into market dynamics, equipping you with the knowledge to better understand and navigate the ever-changing financial world. Whether you're looking to invest, raise capital, or partner, we’ll reveal the tools and strategies needed to generate superior risk-adjusted returns.
There is a record amount of debt maturities in 2024 at close to $1T, and another $1T over the next two years, notes Greg Friedman CEO Peachtree Group.
In this interview with Schwab Nework, he discusses commercial real estate and how the market is still pricing in 50BPS of cuts between now and the end of the year, and its increasingly looking like faith rather than “data driven.”
Watch the full interview here.
It seems like the housing market is currently in a better position compared to previous economic recessions, such as the one in 2009. Back then, 26% of mortgaged residential properties had negative equity, while now it's only about 2.7%. Although industries reliant on debt, like commercial real estate, are facing challenges recalibrating to higher interest rates, it's unlikely that we're headed towards a major economic recession without a significant setback in the housing market.
The stability of the housing sector can help cushion against economic downturns, as it directly impacts consumer wealth and confidence, which in turn influences spending - a significant factor considering that consumer expenditures make up about 70% of the U.S. GDP. This stability enhances the likelihood of sustained economic growth rather than a descent into a recession.
This commentary originally appeared on Greg Friedman's LinkedIn page on May 15, 2024, in response to a Bloomberg article by Alexandre Tanzi titled: "Seriously Underwater' Home Mortgages Tick Up Across the US.
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Learn more about Peachtree Group's Credit division.
Prior to 2022, borrowers enjoyed for over a decade the opportunity to secure loans at near-zero interest rates, a boon that fueled growth and expansion in the commercial real estate market. Today, we see an unprecedented volume of loans maturing in a much higher interest rate environment, with banks reducing exposure to commercial real estate. Despite these conditions, the demand for loans continues to grow.
Historically, a spike in loan demand during higher interest rates would be a warning sign of a looming credit crunch. Yet, defying expectations, recent data suggests a deviation from this pattern, with banks reporting increased lending activity despite maintaining onerous lending standards. This anomaly, combined with moderated inflation, challenges traditional recession indicators. While some analysts cautiously suggest that "this time is different," economic uncertainties persist, posing an interesting question about the underlying market dynamics.
While uncertainties linger, one thing remains clear: the commercial real estate sector faces a pivotal juncture. We are navigating the evolving landscape vigilantly, balancing risk and opportunity in a market shaped by unprecedented forces.
This commentary originally appeared on Greg Friedman's LinkedIn page on May 16, 2024, in response to an Inc magazine article by Phil Rosen titled: A Critical Recession Red Flag is Missing.
Follow Greg Friedman and Peachtree Group on LinkedIn.
Learn more about Peachtree Group's Credit division.
