What's Trending in Real Estate, June 2023

CRE faces a rocky road as loans come due; PE steps in as banks step back; and U.S. hotel construction leads a post-Covid recovery

Rocky Road Ahead for CRE Mortgage Holders and Lenders

More and more articles about the trouble commercial mortgage landlords are facing in the next 3 years are becoming more commonplace every day. Office building vacancies, interest rate hikes, and interest-only loans (with the principal due at the end) are creating tremors across the U.S. On the other side, lessees might find some good news in this: newly opened properties, more power in lease negotiations, and better lease terms from landlords. Here’s a recent sampling of some of those articles.

• Landlords Face a $1.5 Trillion Bill for Commercial Mortgages Over the Next 3 Years

• Westfield Giving Up S.F. Mall in Wake of Nordstrom Closure, Plunging Sales & Foot Traffic

• The Return to the Office Has Stalled

• The Decline of the Five-Day Commute Is a Boon to Suburban Retail

• How Retailers Should Start Catering to Hybrid-Working Customers

• 8 DTC Retail Trends To Watch

• How the Work-From-Home Trend Could Trigger the Next Banking Blowup

• The Next Big Threat Hovering Over the U.S. Economy

Private Equity Steps Up Lending as U.S. Banks Pull Back

As U.S. banks tighten their lending policies and practices in their struggle to deal with higher interest rates, consumer debt, and a raft of uncertainties (see above), private equity—still flush with cash seeking a profitable home—is stepping in. “Non-bank lenders with deep pockets have invested in credit assets for years, but the regional banking crisis could supercharge their expansion into areas such as providing consumer car loans and mortgages, or financing the construction of buildings, according to industry executives,” Reuters reported on May 22. The story noted that direct lending by non-bank creditors contrasts with the practice of banks underwriting debt they can sell in secondary markets. The article cites several PE firm executives backing up this shift. Here are two:

“With loan terms tougher and tighter, the option for private credit providers is on steroids,” said Drew Schardt, head of investment strategy at Hamilton Lane, one of the largest investment firms in private markets.

“We see U.S. commercial banks retreating from real estate lending,” in some cases because regulators have instructed banks to reduce their exposure, said Andrea Balkan, managing partner overseeing Brookfield Asset Management’s real estate finance funds. “It’s times like this when we have a unique ability to grow.”

Hotel Construction Growth Leads Post-Pandemic Economic Recovery

Had enough bad CRE news? Ready for a pocket of positivity? Following their Covid-induced nosedive that hotel brands struggled through as travel, especially business travel, dried up, they’re bouncing back with a vengeance, according to an article on GlobeSt.com about a report from Lodging Econometrics. The article singles out Dallas, New York, and Nashville as leading the recovery.

“While offices continue to struggle with vacancy in most markets, the ongoing bleisure phenomena (business travel + leisure travel) signals demand-side strength, giving confidence to investors that the sector has staying power,” said Afshin Kateb, CFO and Head of Hospitality Investments at Palladius Capital Management. “Hotel transaction activity has picked up despite macroeconomic and capital markets volatility as hotels have proven to be a robust inflation hedge.”

But it’s not all good news, as other problems persist. While telling GlobeSt.com that he is encouraged by the pipeline of new hotels under construction in the U.S., Greg Perry, Senior Hospitality Asset Manager at RREAF Holdings, sounded a cautionary note. On the one hand, he said, “Institutional investors have been fighting with their wallets over high-quality, new construction hotels for the past five years and there is still too much money chasing too few deals.”

However, he added, “Where we see a disconnect this quarter is the jump in the number of projects in the early planning stage. High interest rates make financing new construction far less attractive today, and even with the financing you feel comfortable with in hand, best of luck to any developer looking for skilled tradespeople to actually build the product.”