After a 10-year increase in property values, commercial real estate may be facing a near-term shift in the cycle as the market tops out. As more properties hit the market at a time when interest rates are rising and traditional bank and CMBS financing terms have tightened, the buyer pool is likely to be more sparse.
Even though CRE loans celebrated a record-breaking year in 2017, according to a Mortgage Bankers Association (MBA) report, the CRE market also started to see slowing property value growth and decelerating property sales. Interest rates, historically low since the financial crisis, have been climbing since 2016. Rising rates increase borrowing costs, sapping returns for property owners and constraining owners’ borrowing capacity.
Additionally, underwriting standards remain conservative, extending a trend that accelerated in recent years as banks hamstrung by regulations pulled back from the CRE space. This has reduced the number of financing options for borrowers and given the remaining lenders more leverage in negotiations. As the CEO of a technology-enabled commercial real estate direct lender, I’ve seen how the private debt space has grown as small- and mid-sized borrowers abandoned by large banks seek alternative financing solutions.
Storm Clouds Are Forming
Consequently, many CRE owners may be forced to sell their properties and potentially compromise on price in the coming years. These factors will also likely sideline many potential buyers, applying further downward pressure on real estate prices.
Every sector goes through periods of cleansing and rebuilding, and CRE is no exception. The lenders best positioned to prosper in the next stage of the CRE market’s evolution will possess strong underwriting capabilities and experience navigating different economic cycles. They’ll also need to offer the latest technology to give borrowers easy and fast financing solutions.
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