CRE Grapples With New Finance Challenges: NYU Conference

Industry leaders size up the capital markets landscape at the annual event.

NYU SPS Shack Institute of Real Estate’s 55th Annual Conference on Capital Markets in Real Estate

“We are here to tackle—like 55 years ago—the issues that confront us.”

That’s how Marc Norman, chair & associate dean at New York University’s Schack Institute of Real Estate, set the stage for the 55th annual Conference on Capital Markets in Real Estate this week. Across the spectrum of prominent executives, lenders, economists and other stakeholders, one trend was abundantly clear: commercial real estate is in a place of great volatility that presents numerous unknowns, risks and stresses.

“We are clearly entering a different phase here,” said Jefferey Dimodica, CFA, president of Starwood Property Trust. Historically, he notes, spreads have tended to tighten as rates went up. The markets today, however, are experiencing a different case. Investors could previously be nimble and take advantage of rates before and during the pandemic, they are stuck with their current maturity rate today.

READ ALSO: How a Looming Recession Impacts CRE Deals

On the CMBS side, the supply of loans for securitization is way down and unlikely to recover until there is more macro-market stability. As buyers wait to see where the economy and the Federal Reserve will go next, this change is unlikely to be in the near horizon, according to Miriam Wheeler, managing director at Goldman Sachs.

Geopolitical uncertainty across all markets is causing a paralysis in the real estate industry. Jesse Home, managing director & head of real estate capital markets and credit investments at GIC, reported that his company has been macro cautious for a while.

Uncertainty to opportunity

“The way things are moving today is faster than at previous times in my career,” said Jim Costello, chief economist at MSCI. “It is shocking to me how quickly some of the changes in the interest rate environment have forced the market to seize.”

Supply is quickly dropping off due to the difficulty of securing reasonable financing. Similarly, construction starts, and overall transaction volume, are decreasing. Banks are operating within a risk limit. Many projects now fall outside that limit, making it more challenging to find financing for riskier assets and markets as well as to secure refinancing.

However, projects are still advancing in markets and asset categories that are performing more strongly. According to Tim Johnson, Blackstone’s global head of real estate debt strategies, where there is a more functional financing market, such as in multifamily, there is decent liquidity.

Another example: Financing is currently feasible for industrial assets with tight vacancy rates in Class A locations, observed Thomas Rugg, managing director at Deutsche Bank Securities’ commercial real estate group.

Most experts agreed that they are being cautious on office spaces unless the asset is at the top of its class. Secondary markets are also key as national migration patterns drive continued strong growth in these areas, especially across the Sun Belt.

“I think ultimately, you have to get back to the fundamentals. People are still going to buy houses because they need a place to live. If they can’t buy, they will rent,” said Joe Williams, co-founder of Keller Williams Realty. “The reality is, it is a new day tomorrow, the sun will come out, and if you look at the long-term prognostics for real estate, it will still be one of the best asset classes—bar none.”

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