For many, the long wait continues for commercial real estate activity to pick up, even after the Federal Reserve lowered interest rates by 50 basis points for the first time in years.
Neil Axler, managing director of EisnerAmper Real Estate Advisory Services, said the September move by the Fed has not yet resulted in “meaningful increases” in dealmaking or property values. The impact of the next expected rate cut is also unclear.
“The real estate market was optimistic that November will bring another significant rate cut, but the healthy September jobs report has tampered with that enthusiasm, and the November rate cut will likely be lower than the September rate cut,” Axler said. “Furthermore, cap rates typically lag behind interest rates, so it is unlikely that cap rates will decrease for a while.”
Axler said that while CRE brokers tell him the market is somewhat better than it was a year ago, an array of obstacles continue to stand in the way of many potential deals.
“The brokers indicated that activity is still low due to expensive financing, lower overall property valuations, high vacancy and high management costs, such as high insurance premiums, expensive labor and high energy costs,” he said.
Nevertheless, some savvy commercial real estate players are finding ways to finance and close major deals in this restrictive environment.
Bisnow reached out to companies that closed notable deals in mid-2024 to learn how they made them happen. Their advice — ranging from playing to your strengths and doing your homework to nurturing strong relationships with sponsors and lenders — is battle-tested and likely to help others succeed when the industry finally begins to pick up steam again.
Big Conversion In The Big Apple
When Northwind Group, a Manhattan-based real estate private equity firm and debt fund manager, agreed to lend $75M to a joint venture of Metro Loft Management and David Werner Real Estate Investments, the loan did more than cover the $105M purchase of Alexandria Real Estate Equities' stake in the former Pfizer headquarters at 219 E. 42nd St. in Midtown Manhattan.
Ran Eliasaf, founder and managing partner at Northwind Group, said the loan also exemplified his firm’s strategy of focusing on high-quality sponsors and properties in major gateway markets such as New York City.
“This loan reinforces our commitment to those goals while also highlighting Northwind’s evolution into a market-leading debt fund capable of closing large loans for prominent real estate investors and developers,” Eliasaf said.
Eliasaf said his firm had confidence in the loan, thanks largely to its experienced sponsorship and relatively low basis per square foot.
The joint venture plans to convert 219 E. 42nd St. into a 660-unit, 29-story multifamily property. The adjacent property at 235 E. 42nd St. is also part of the residential conversion plan.
Eliasaf credited his firm’s in-house experience for allowing it to underwrite the large-scale office-to-residential conversion.
“The current property, along with 235 East next door, will be the largest office-to-residential conversion in NYC to date,” he said. “We are excited to be providing financing for a property of this magnitude.”
His advice for others looking to make large and complex commercial real estate deals pencil?
“As a debt fund, it is important to remain cognizant of potential downsides in every deal,” Eliasaf said. “At Northwind, we believe that through rigorous review and carefully selected deals and hands-on asset management, you can generate attractive risk-adjusted returns.”
‘Embrace Creativity’
Sarah Hunter, senior vice president of commercial real estate for Byline Bank, said several factors made the institution confident in providing $19.1M in financing for six industrial properties in Chicago and New Jersey.
The deal involved VK Industrial Holdings VI LLC, an acquisition fund and partnership between Venture One Real Estate and Kovitz Investment Group.
“First, the opportunity involved a longstanding client, whom we consider best in class in terms of sponsorship,” Hunter said. “This long-term relationship provided us with a high level of trust and reliability.”
Infill industrial properties are also a high-demand asset type and generally regarded as a safe investment, she said.
“The properties were already cash-flowing, minimizing repayment risks, and were located in strong primary markets, further enhancing their appeal,” Hunter said.
Byline Bank prioritizes maintaining strong client relationships and finding creative financing solutions for clients, particularly in the asset classes and markets it believes are the safest, Hunter said.
“While our real estate lending team operates as generalists as far as asset class, the current focus naturally leans toward high-performing asset classes like industrial properties,” she said.
Even with all that going for it, the financing took place before the Fed began to lower interest rates, which presented specific economic risks for Byline and the client to overcome jointly to protect both parties.
“Higher interest rates tightened the deal's feasibility for us,” Hunter said. “To address this, we implemented creative solutions, such as implementing an interest rate hedging strategy to safeguard against potential rate increases.”
Hunter advises others to “embrace creativity” in structuring deals and to focus on primary markets where they have strong expertise.
“Byline's approach, offering flexible solutions rather than competing solely on price, shows the importance of agility and a partner that really understands your business,” she said. “Building on deep knowledge of specific markets and leveraging strong, experienced sponsorships helps provide us with a competitive edge, especially when facing complex challenges like a volatile interest rate environment.”
Benefits Of A Strong Lender Network
Essex Capital Markets President Darragh Griffin said a sponsor’s “strong reputation” inspired Essex to close on a $9.5M loan to refinance two multifamily properties in Chicago’s Lakeview neighborhood.
The financing was secured for a Chicago-based private investment firm and includes a 10-year, full-term interest-only loan.
“In today's market, the opportunity to provide a solution for such a preeminent sponsor was highly attractive to us,” Griffin said. “This deal perfectly aligns with our organization's goals by allowing us to find a creative solution in a tough financing market. It also enables us to align with a best-in-class sponsor, further strengthening our position as we grow into a prominent mortgage brokerage group.”
As with others Bisnow spoke with, Griffin said Essex relied on its experience to come up with a creative solution to make the deal work.
“We had to devise strategies to achieve the desired outcome while accommodating the sponsor's preference to avoid injecting additional cash into the refinance, or at least to minimize it,” he said. “We overcame these challenges through innovative structuring and close collaboration with all parties involved.”
Griffin said Essex plans to work with the sponsor 180 days before the loan's maturity to help with the next refinancing to ensure a smooth transition.
“Our advice to fellow commercial real estate professionals is to build a strong network of lenders and create a competitive marketplace for each individual deal,” he said. “Don't be afraid to think outside the box and get creative with deal structures to achieve the desired outcomes.”
‘Can’t Stop Innovating’
When Slate Property Group and Fundamental Advisors closed on a $210M refinancing package this summer, it was a big deal in more ways than in dollars and cents alone.
The deal involved a portfolio of 12 transitional and affordable housing properties in Manhattan, Brooklyn, Queens and the Bronx. John Valladares, managing director at Slate Property Group, said it benefits more than just the immediate stakeholders, as affordable housing is in scarce supply.
“We build and support every kind of housing,” Valladares said. “These transitional homes are a key part of the housing ecosystem for families and individuals who recently experienced homelessness. Keeping these assets strong is vital to serving these New Yorkers.”
Valladares said there is a basic need for refinancing across these assets, and Slate Property Group also saw an opportunity to bring new institutional partners into the transitional housing space.
“The cost of financing and the scarcity of partners is a key driver behind costs in the sector, most of which are borne by the public,” he said. “Freddie Mac’s use of social impact bonds in this space could help lower the cost of financing in the marketplace and reduce the costs of providing transitional housing to people in need.”
Because the financing and public sector support for transitional housing differs from many other multifamily assets, Valladares said his firm worked closely with its institutional partners, a process that also served to build up a degree of comfort and familiarity among stakeholders.
That is the kind of approach needed to make these deals work, he added.
“Interest rates and a tough lending environment can make people pull back,” Valladares said. “But we’re in the middle of a housing and homelessness crisis. We can’t stop innovating new solutions to build our way out of it.”
This is the second 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 article was produced in collaboration between Studio B and EisnerAmper. 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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