In their 2023 U.S Real Estate Market Outlook, CBRE predicted it would be a challenging year for commercial real estate, and data from H1 has proved the prediction mostly right. Between January and February, sales totaled only $47 billion–the weakest opening two months of a year since 2012, with Q1 transaction volume down nearly 69% year-over-year. By May, total transactions were down 61% compared to 2022, with declines across all asset classes, according to MSCI.
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Here’s where the private commercial real estate industry finds itself as we look back at H1 2023.
A disconnect between buyers and sellers
Simply put—the markets are stuck. Sellers think their properties are worth more than the buyers are willing to pay, and there's been no catalyst to force people to meet in the middle.
Sonny Kalsi, co-CEO of BentallGreenOak, told Juniper Square, “Commercial real estate is very much at the center of the storm because of what's happened to rates. It's not a pretty time to be a seller. What are real asset values right now?”
The problem is that with no deals getting done, no one really knows—so what will it take to shake the system loose?
Ted Martell, co-founder of Maverick Real Estate Partners, suggests it may be the regulators who break the stalemate. “Regulators are going to pressure banks to face reality and remark on their loan positions, which should encourage sales because once the positions are marked down, the value disruption is recognized.”
He also wonders if the FDIC’s planned sale of the Signature loan portfolio—$34 billion–would be the reset the industry needs. As the biggest loan sale in commercial real estate, it “ought to serve as a mechanism to reset pricing. When you point to those sales and ensuing transactions, it's going to be hard not to mark down positions and acknowledge what they are actually worth.”
Meanwhile, Jeff Toporek, co-founder of F.D. Stonewater, argues that either debt maturities or investor pressure to sell could be the straw that breaks the camel’s back.
A wall of debt maturities
An estimated $528.7 billion of commercial mortgages mature this year, according to Trepp.
Morgan Stanley found nearly $1.5 trillion in CRE debt is coming due by the end of 2025, and maturities will peak at $550 billion in 2027 for a total of $2.0T over the next four years.
With small lenders holding 70% of CRE loans, many are worried about borrowers’ ability to refinance, as many loan holders are still paying interest rates lower than the current levels. As The RealDeal reported, “An increase in debt maturities is not always problematic, but it is when interest rates have spiked, office values are in the midst of a historic decline, and regional banks are retrenching.”
No relief for office
Office remains the most at-risk among property types. According to Trepp, about a third of the commercial real estate loans held by banks set to mature in 2023 are on office properties.JLL reported that Q1 vacancies were 49 basis points higher quarter over quarter... Meanwhile, Colliers reported “a record 254 million square feet of sublease space available across the U.S. office market…significantly higher than the prior cycle’s peak of 143.3 million square feet seen in Q2 2009.” And with $24.8B in current distressed properties, office surpassed retail and hotels as the sector with the most assets in potential distress.
A soft landing?
BofA Global Research forecasted a "soft landing" for the U.S. economy and no longer expects a mild recession in 2024. Morgan Stanley recently raised its economic growth forecast, while Citigroup and Goldman Sachs increased their S&P 500 year-end target. And although U.S. Federal Reserve Chair Jerome Powell recently said the central bank's staff no longer forecasts a U.S. recession, the real estate market seems to still very much stuck in “wait and see,” with many readying themselves for a wave of distress.
In May, rumors circulated that Bain Capital was looking to raise $4 billion for a new global "special situations fund" to snap up distressed and equity investments. In June, Artemis Real Estate Partners closed its latest real estate vehicle, Artemis Fund IV, with $2.2B in commitments, more than double its previous largest fund. As Sonny Kalsi pointed out, “If you're a lender with dry powder and no legacy issues, it's a great time to be out there.”
Will real estate get a soft landing this year? Will an influx in distressed deals hit the market and shake things loose? Only time will tell.