It has been a difficult few years for commercial real estate investors and developers as high interest rates, office vacancies and a fluctuating market continue to take their toll on the industry.
In 2024, however, things have been looking up.
In March, EisnerAmper spoke with Delaine Cos. founder and CEO Jerrod Delaine, who expressed confidence that real estate investors would no longer see their values significantly impacted by interest rates. In July, Blackstone President Jonathan Gray told analysts, “The tenor of the conversations around real estate have improved.”
That being said, challenges remain. Commercial property values are down 7% in the past 12 months, led by a 14% decline in office value. While activity seems to be slowly improving in the office sector, JLL estimates that 60% of office leases that are active were signed before the pandemic and therefore are particularly susceptible to downsizing. CRE lenders have responded to higher costs of capital by reducing the debt they offer to borrowers, with CMBS providers particularly reducing loan-to-value ratios by 14% to 55.7% between 2015 and 2023.
The bottom line is that the CRE investment market remains complex and competitive, and for many, wins can feel few and far between. With that in mind, Bisnow spoke with several leaders in the CRE lending and development world to learn how they are making deals pencil in this environment, what asset classes they are interested in and how they are preparing their portfolios for success.
Justin Guichard, Managing Director And Co-Portfolio Manager, Oaktree Capital
Guichard said his company’s real estate debt strategy is to achieve attractive risk-adjusted returns and generate income through investments in private real estate-related debt and traded securities, primarily in the U.S.
His team is particularly looking at the middle market, where there is less competition for capital due to the pullback by regional and community banks. Oaktree also sees opportunities in the residential sector.
“We believe we have the opportunity to capture significant value in CRE assets, as prices have declined from their most recent peak by 21%, or approximately two-thirds of the declines CRE suffered in the Global Financial Crisis,” Guichard said. “The opportunity set remains compelling as the ongoing dearth of liquidity, specifically in the regional and community banking system, continues to create an attractive environment for private real estate debt. We expect banks will remain on the sidelines for the foreseeable future given their liquidity concerns, exposure to commercial real estate — and thus their legacy portfolio issues — as well as the increased scrutiny they may face by policymakers concerned about potential systemic risk.”
Teodora Zobel, Chief Investment Officer, Midwood Investment & Development
Zobel said the Midwood team sees an increasingly attractive set of opportunities in the New York metro area.
“We feel that the region is poised for continued growth and investment in both the short and long term,” Zobel said. “Lender or LP-driven sales of high-quality assets, coupled with continued uncertainty, are helping to narrow the bid-ask spread. There are finally some interesting opportunities in the market.”
Lisa Knee, Managing Partner, Real Estate, EisnerAmper
Knee said EisnerAmper still sees money sitting on the sidelines, looking for the right deployment opportunity.
“While underwriting standards have tightened over the past few years, lenders are looking to earmark capital to borrowers with Class-A assets and high-quality tenants,” Knee said. “Although financing for new construction has been challenging, we have witnessed this in the industrial market. We have seen an allocation of capital to existing distribution centers, warehouses and other logistics centers having long-term tenants in place.”
Knee added that hospitality assets have bounced back nicely from the pandemic, with the destination and luxury segments operating the best. She said that with the rise of artificial intelligence, there is now huge demand for data centers. Investors also continue to chase Class-A retail properties in good markets, and grocery-anchored retail has remained strong.
Regardless of property type, investors want properties that are run well.
“Successful tenant retention results in higher occupancy rates,” Knee said. “Property managers must understand their tenants' needs. This is most effective through personal communication. Providing quick responses and keeping tenants updated through regular check-ins is imperative today. Tenants want modern facilities, and technology upgrades are often needed. Preventive maintenance can often cure potential issues before problems arise.”
Bob Knakal, Chairman And CEO, BK Real Estate Advisors
Knakal predicted that within the next six to nine months, we will start to see the biggest sell-off in the history of NYC.
“Class-B and C office products will lead the way,” Knakal said. “Values have dropped so sharply that there will simply not be a way out for folks with too much debt. Other assets will have to be sold to raise the capital necessary to effectuate cash-in refinancings, and most refinancings will require that fresh capital, as debt amounts will be lower than they were before.”
He said newly built Class-A office will continue to do relatively well, but Class-B and C are going to go through a massive change in ownership.
“I think the biggest decision for owners today is to figure out which assets they want to hold on to and then how to hold onto them,” he said. “Due to financing difficulties, many owners are selling assets to raise capital to effectuate cash-in refinancings. This dynamic will play out over the next two to three years. Many NYC owners are also working on geographic diversification strategies as a way to reduce concentration risks. Reducing portfolio sizes and using capital from sales to bolster the balance of their portfolios is a strategy many owners are considering.”
Ryan Boan, Head Of U.S Retail And Mixed-Use Transactions, Nuveen
Boan said that while wins don’t come as often as they used to, Nuveen is finding them despite broader macroeconomic challenges.
“We recently closed on a [life insurance company] loan at attractive terms on a grocery-anchored property we acquired earlier this year in the Atlanta area,” he said. “On the other end of the spectrum, we’ve also had recent success refinancing several of our regional mall properties.”
David Shechtman, Senior Executive Managing Director, Meridian Capital
Shectman said that as a mortgage note sale and bankruptcy specialist and licensed attorney with 24 years of experience, some of his biggest years have been in the down markets.
“In [May], we sold more than $100M of senior secured mortgages for two lenders and are regularly called upon by challenged sellers and their counsel to work out loans and sell real property in conjunction with lenders,” he said. “We aren’t retooling — this is old hat for me and my team, and I love it.”
Jared Toothman, Executive Vice President, Lincoln Property Co.
Toothman said Lincoln Property Co.'s NYC metro team closed three acquisitions this summer, two multifamily development sites in New Jersey totaling 970 entitled units and a transitional medical office building in Manhattan.
“These transactions derived from building a relationship with the existing owners to create a fair, mutually beneficial structure in which Lincoln invested new capital and assumed day-to-day management to expedite vertical development and stabilization,” he said. “We now control the best residential development pipeline in the region with our local partner and the premier off-campus medical office building in the country, as evidenced by the rents and tenancy achieved to date.”
Toothman added that capital markets dislocation has created opportunities everywhere, across all property types.
“Residential, whether acquiring existing multifamily assets at a discount to replacement cost or prime entitled development sites stalled by the rapid rise in rates, is the most obvious opportunity for investors with perspective,” he said. “The NYC metro area is particularly attractive because it is impossible to oversupply this market, with by far the largest denominator of existing units, among the oldest housing stock, and daunting regulatory and financial barriers to new supply.”
Andy Cohen, Managing Director Of Development, BRP Cos.
Cohen said that when navigating uncertainty over the last year, BRP Cos. has focused on deploying creative strategies to take advantage of the transition to a more favorable interest rate environment.
“We've been actively involved in the development side of the market, and we continue to acquire development sites to ensure that we're in a position to move quickly when the timing becomes more optimal,” he said. “We believe this strategy will position us to secure construction financing quickly once the interest rate environment improves.”
He added that BRP maintains a diverse real estate portfolio, including affordable and market-rate units.
“At the core of our business is the commitment to providing all tenants with great buildings that provide a wealth of amenity-rich offerings and best-in-class services, regardless of the market conditions,” he said. “Our approach blends customer service with hospitality-inspired property management. We recently unveiled The Monarch in Jamaica, Queens, a stunning 605-unit property. It sets a new standard in multifamily living with unparalleled amenities including indoor basketball and pickleball courts, a golf simulator, yoga studio, dog run and pet spa.”
Michael Caracciolo, Head Of U.S. Asset Management And New York Office, Ivanhoé Cambridge
Caracciolo said building a strong portfolio is critical to his company’s goal of attaining balanced returns with a longer-term focus on diversification and tailoring strategies to each city and asset class.
“Our investment strategy is balanced among targeted opportunities to de-risk our portfolio, thematic value-add strategies with shorter hold periods to crystalize gains in a dislocated market, and portfolio optimization through capital recycling in areas of highest potential, including development, structured products and alternative sectors,” he said.
He added that workplace strategies have transformed how tenants use space, and it is essential for Ivanhoé Cambridge to create a purpose-driven portfolio looking forward.
“It goes beyond adding amenity spaces. It involves creating a holistic, streamlined ecosystem that minimizes friction for our occupants,” he said. “Our goal is to provide real estate solutions that cater to a diverse tenant base, with a built environment that is deliberate in the way it can address the needs of our tenants, now and in the future. We accomplish this via adopting an active asset management approach, and this mindset allows us to identify, prioritize and pivot to address the needs of our tenants and where we expect demand to be in the future.”
Jovana Rizzo, Director Of Corporate Communications, The Durst Organization
Rizzo said to keep tenants satisfied, Durst not only maintains its properties but continually makes investments to improve them.
“The office experience matters to tenants and their employees,” Rizzo said. “At 825 Third Avenue, for example, we completed a $150M renovation of the tower and added an indoor-outdoor amenity space. 825 Third Avenue is nearly 50% leased after Durst completely emptied the building to conduct the top-to-bottom renovation.”
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We are more than halfway through the year, and uncertainty reigns throughout some sectors of CRE. As CRE professionals continue to wait for expected interest rate cuts, a Bisnow survey of 61 global CRE executives found that the majority plan to keep their heads down throughout the rest of the year and focus on refining their operations. However, as these quotes show, some CRE leaders are embracing the unknown and are positioned to find wins even in difficult times.
This is the first in a series of three articles on the complexities of the CRE market and the people who are succeeding in it. Check back here for the next installment.
This series is being produced in collaboration between EisnerAmper and Studio B. Bisnow news staff was not involved in the production of this content.
Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to studio@bisnow.com.
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