What a difference a year makes.
After years of breakneck growth – even through the seemingly unprecedented challenges presented by the pandemic – the commercial real estate industry at large is now facing what is likely to be a year of caution and contraction. Those sentiments were on full display at the annual Commercial Real Estate Finance Council (CREFC) conference in Miami Beach Jan. 8-11.
My fellow Spaces VP, Jorge Mendez, and I went to the event to get a sense of how the investment community is preparing for the year ahead, and find where a sense of optimism is shining through the otherwise tempered forecast for 2023.
Here are some takeaways we heard along the way:
‘Wait and See’ Mode
While inflation and rising construction costs have created persistent headwinds for commercial real estate at-large, perhaps the biggest challenge the market faces in 2023 is the high interest rates that have made outside capital increasingly hard to come by. Institutional lenders are understandably operating with extreme caution, although that creates a broad opening for alternative capital to fill the gap. For now, however, the prevailing wisdom is that even private lenders are largely laying in wait as they read the tea leaves and strategize on how to structure terms that will be favorable even in a difficult environment. Until things take clearer shape on that front, deal activity is likely to slow, even for sectors with favorable outlooks like multifamily and industrial.
Interest Rates Prompting a Selloff?
The Federal Reserve’s steadfast commitment to interest rate hikes as a counter to inflation may have a profound effect on commercial real estate – particularly properties that were purchased with floating rate financing. Depending on the precise structure of a contract, many owners may be forced to lock in new insurance and other terms at the current high rates – a costly measure that can have an extremely adverse effect on long-term returns. Many in the investment community expect this widespread maturation will cause many properties to seek a quick sale rather than move forward on riskier terms, which could then push down property valuations across the market.
Multifamily is Still a Darling
Multifamily has long been among the darlings of the commercial real estate industry, and despite facing an increase in both market-based and regulatory challenges, pundits at CREFC said they expected its success to continue. In the most simple terms – people need a place to live, and those companies that can play a role in delivering new homes are typically in prime position to succeed. While the sector is currently in a period of adjustment as both rents and valuations begin to decline for the first time in years, it retains what is likely the highest floor of any sector across CRE.
Florida is a Force
The event included a special panel on the ostensibly unstoppable success of not just Miami – where Antenna’s Spaces practice recently added two dedicated staff members and a marquee client in Related Group – but the state of Florida as a whole. Featuring Miami Mayor Francis X. Suarez, the discussion focused on how the state’s notoriously hands-off approach to regulation has been a magnet for ambitious investors, particularly as it continues to attract new residents from the Northeast and other regions following the pandemic. Even as the overall market falters and South Florida’s big bet on cryptocurrency begins to look increasingly questionable, CREFC speakers saw no clear end to the stream of investment dollars flowing to the Sunshine State.
Contact our Spaces team to discuss what these takeaways could mean for your business.