The year 2023 is less than a month old, but commercial real estate professionals are weighing in on what they think will happen in the industry this year, Commercial Observer reports. The combination of higher borrowing costs, inflation and questions about the economy have driven industry pros to offer their predictions.
“If you think about the 1970s, which is the last time we really saw this economic situation, most of the people in the real estate business, they either weren’t alive or they or they weren’t investing,” Ronald Dickerman, founder and president of Madison International Realty, one of New York City’s largest retail landlords, told Commercial Observer.
Dickerman noted that previous Federal Reserve Chairman Paul Volcker raised rates to battle inflation when he was in charge during the late 1970s and 1980s. He believes current Fed Chairman Jerome Powell is doing the same, which could allow the market to settle in for the duration this year.
“This new rate environment is going to persist for a long period of time,” Dickerman said.
Meanwhile, Raphael Fishbach, principal at lender Mesa West Capital, noted that borrowers may be entering a recession, but should be in better shape from a loan-to-value basis than they were in prior financial down times like the Great Financial Crisis. This more promising position is due to excess leverage use that was restrained during the last decade, Fishbach told Commercial Observer.
“However, the challenge is that this time around we are in a rising-rate environment,” he said. “This has a negative impact on carrying costs and ultimately values.”
Property owners lacking liquidity might struggle with higher rates, while those with access should manage alright in 2023, according to Fishbach.
Additionally, said Sam Chandan, director of New York University’s Chen Institute for Global Real Estate Finance, financial associations are better equipped to handle economic downturns than they were during the Great Financial Crisis because they can “bring capital to well-structured projects.”
A different outlook for CRE in 2023
Morris Betesh, a senior managing director at Meridian Capital, forecasted that long-term rates will decrease and stabilize, which would resolve a lot of the uncertainty surrounding the industry, Commercial Observer reports.
He also noted that the “bid-ask” spreads in the market have increased — the spread is wide enough now that it’s limiting investment, according to Chandan. Brokers are hopeful that more people will return to the market in 2023 — and in turn increase liquidity and reduce these spreads — but no one knows when or if that will happen.
“I personally believe that the current situation in real estate is not sustainable,” Dickerman told Commercial Observer. “This is going to continue through the spring. The Federal Reserve is still going to raise interest rates. So, borrowing costs are going to rise, but cap rates have been slow to adjust. There will be continued pressure on prices.”
Variety of CRE investment opportunities in 2023
Dickerman noted his firm was invested in “tech-enabled, growth-oriented sectors that were involved in the multifamily, single-family home for rent, seniors housing, logistics, cold storage, life science and data centers,” but have backed off retail and office space CRE.
This decision appears to echo what market observers are seeing — low expectations for the office sector due to continued work-from-home arrangements for a lot a of companies. Older office spaces face an even bigger uphill climb compared to newer buildings with modern amenities.
“A number of buildings are really going to struggle in the coming year and years,” Ric Clark, co-founder and managing partner of WatermanClark, told Commercial Observer. “To be honest, some may only be worth land value.”
Instead, Clark and others see offices being converted in 2023, although it will take some effort to make those conversions cost-efficient or even possible, he said.
When it comes to financing, there are expectations that the collateralized loan obligation (CLO) market will bounce back, according to Betesh.
“You’re going to start to see the CLO market come back to life next year,” he said. “That was a big driver of liquidity for the last three years, and it really dried up in the second half of 2022. I think issuances will pick up in 2023.”