The stress on commercial real estate is set to get worse, writes Greg Friedman.
The global financial crisis that began in 2007 reshaped the real estate market. Today, commercial real estate is facing a similar “Great Reset.” Property valuations are resetting, capital availability is restricted, and investment activity is curtailed.More than $1.5 trillion of commercial real estate loans will mature over the next three years. Traditional lenders and the securitization market are unlikely to provide a clear path to replacing these loans.
However, due to muted investment activity coming off the highs of 2021, the market hasn’t fully appreciated the decline in property values. The rapid increase in interest rates has had a profound impact on commercial real estate property valuations. As interest rates surge, capitalization rates tend to rise in response, reflecting the higher yield expectations of investors. This directly reduces property values as the anticipated return on investment increases, making certain commercial real estate assets less attractive to potential buyers.
One critical aspect of this reset is the recalibration of values across property types. It’s essential to recognize that not all asset types are affected equally. Assets trading at lower capitalization rates and higher multiples of cash flows—again, multifamily—are more susceptible to the impact of rising interest rates.
In the near term, private credit providers stand to gain as they can provide much-needed capital precisely when the industry needs it most.
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