In the current commercial real estate (CRE) cycle, valuations are low, expenses are high, and market uncertainty is rampant. Amidst these changes and confusion about what’s to come, it can be difficult to make guided decisions and feel confident in your portfolio.
During a recent webinar (2024 State of CRE: Insights to Help You Survive the Next Market Cycle), our panel of experts, Rob Finlay, Founder and CEO of Thirty Capital, Bryan Doyle, Managing Director of Capital Markets of CBRE, and Aaron Wessner, Managing Director – Head of Capital Markets of Cantor Fitzgerald Asset Management, addressed several important questions and topics that are important to understand to help us “survive until 2025.”
Read ahead for a brief overview of three of the topics we discussed. Or watch the on-demand webinar to hear the full conversation.
What is the Catalyst to Unlock Transaction Flow?
Commercial real estate transaction volume is down with multifamily sales tanking by 74% in Q1 2023 – the largest decrease since Q1 2009. During the webinar, we explored market factors/occurrences, like some owner/operators no longer being able to afford lavish lifestyles, that might cause the market to “open up”. When the market opens up, we predict more transactions will be created – leading the industry to a long-awaited recovery.
From the debt management perspective, Bryan Doyle shared some questions to be considered as we talk about market recovery:
- Is the financing available?
- Can the buyer secure a loan for the property you’re acquiring?
- What kind of access to debt will buyers have?
- What effect will access to debt have on underwriting?
- What will the deal look like on the other end of financing?
Ultimately, someone has to be courageous enough to make the first couple of transactions that will set the price point and determine the right balance between buyers and sellers.
Aaron Wessner added to the conversation by sharing that “at some point we’ll see real estate firms start to transact again because it’s what they do”. In response to Aaron’s point, it was noted that for many firms, transacting is not necessarily “what they do”. Rather, transacting is a form of survival for a large portion of real estate owners and operators, syndicators, and private equity firms.
For example, owner/operators with in-house property management teams have very employee-intensive businesses. Everytime they sell an asset, the goal is to grow the portfolio. Essentially, anytime they sell they are looking to redeploy that capital into something new. But right now if people are selling to try and harvest promotes, yet at the same time unable to redeploy that capital, their business are getting smaller. Thus, the survival element comes into play, as they are ultimately working themselves out of jobs.
Where Do We Find Opportunity In This Market?
With declining transaction volumes, finding opportunities isn’t always easy. Our panelists shared that opportunities will be available. However, the challenge will be accessing those opportunities.
Rob Finlay shared that “owners/operators in the multifamily space are going to try to find companies that have bought deals in the last few years that don’t have a lot of fee income”. He shared that those will be the “desperate sellers” looking to transact. But when it comes to finding opportunity in this market, our panelists agreed that multifamily is the way to go; however, it’s not the only option – retail and industrial are assets that may pose a lot of opportunity.
Our panelists also spoke about finding opportunities by market/location. For example, the Sunbelt market, Florida, and Texas were mentioned as areas that have historically been well liked and are anticipated to remain popular in the long term – despite insurance and expense challenges.
Where Does the Smart Money Look?
Today, the owners/operators with “smart money” are investing in both their people and their systems. They are also taking a close look at their balance sheets to ensure that they can weather the current storm. Additionally, Aaron Wessner shared that they are “fortifying those balance sheets so that they can be nimble enough to capitalize on opportunities when they show up.”
Panelists shared that owners/operators are also being proactive with their most important relationships. For example, now isn’t necessarily the time to search for new relationships. Instead, you should deepen relationships and have important conversations with your best lenders, investors, and other trusted partners/advisors about your portfolio. As we continue to navigate such a tough market, relationships will continue to be at the forefront of commercial real estate success.
Keeping an eye on trends and market indicators and understanding how they may impact your asset and portfolio performance will be key as you prepare for the new year. Watch the on-demand webinar, 2024 State of CRE: Insights to Help You Survive the Next Market Cycle, to hear the full conversation!
