As we move into the final weeks of 2024, the commercial real estate finance landscape finds itself in familiar territory we saw during the GFC, the Dot-Com Bubble, and the S&L Crisis:
- Rising interest rates,
- Increasing loan delinquencies, and
- A nuanced economic recovery with mixed signals
These events reshape how deals are evaluated and closed. With decades of experience as a CRE finance professional, I see this period not as a challenge but as an opportunity for strategic recalibration.
Interest Rates: A New Normal?
The Federal Reserve’s incremental rate cuts this fall have provided some relief, but the cost of capital remains high compared to the pre-pandemic era. The 10-year Treasury yield, hovering near 4.46%, underscores the ongoing tension between inflationary pressures and a resilient economy. Borrowers, however, are increasingly disappointed that the Fed’s actions haven’t resulted in substantial rate drops, revealing a disconnect in understanding how broader economic factors influence interest rates. This frustration has led buyers to adopt more cautious underwriting standards while lenders, facing their own challenges, continue to scrutinize deals with heightened rigor.
JLL CEO Christian Ulbrich’s perspective on the interest rate uptick offers insight. He downplayed its direct impact on deal flow, emphasizing that pricing adjustments and innovative deal structures can bridge the gap. This shift underscores the importance of creativity in structuring transactions to sustain momentum in an otherwise constrained market.
CMBS: A Barometer of Distress
The October 2024 CMBS delinquency rate is nearing 6%—a level not seen since the early 2010s—a flashing warning light for the industry. Office properties account for over 60% of newly delinquent loans, reflecting the sector’s ongoing struggles with remote work trends and softening demand. Playa Vista’s “Silicon Beach,” encapsulates this dynamic. The recent sale of The Bluffs office campus at a steep discount highlights how defaults redefine asset valuations.
For CRE finance professionals like us at Shōkunin, these developments necessitate a reevaluation of risk parameters. Working with clients to mitigate refinancing risks and exploring non-traditional funding sources, such as private capital, mezzanine, or tax-advantaged financing options, can provide critical lifelines.
Rent Growth: A Silver Lining?
Despite broader headwinds, Southern California’s multifamily sector offers a glimmer of hope. Forecasted single-digit rent growth suggests stability, if not robust expansion, particularly in urban markets. However, this optimism must be tempered by the broader economic context. As Federal Reserve Chair Jerome Powell noted, housing inflation remains sticky and may not fully normalize until mid-2026.
Strategies to Thrive
In this complex environment, adaptability and foresight are paramount. Applying the lessons of disciplined client and project selection, as outlined in my earlier work with “kill criteria,” can help focus efforts on high-value opportunities. For instance, developers may need to pivot toward phasing larger mixed-use projects or refining them into smaller infill undertakings to align with shifting demand dynamics and tighter capital markets.
Opportunities in Chaos
Periods of market dislocation often reveal the most compelling opportunities. Whether it’s identifying underpriced assets, structuring creative financing solutions, or leveraging public-private partnerships, success in 2024 will hinge on staying ahead of the curve. As we’ve seen in the office and multifamily sectors, those who embrace innovation while maintaining fiscal discipline will emerge stronger on the other side.
Building a Scalable Future Together
At Shōkunin Capital and Strategy, we’re passionate about partnering with developers and property owners to create businesses that are not only viable but scalable. Our expertise in creative financing strategies is designed to help you unlock opportunities, generate lasting wealth, and lay the foundation for a legacy that endures. Whether you’re seeking to expand, optimize, or transform your projects, we’re here to guide you every step of the way.
Visit us at Access to Capital for Commercial Real Estate or learn more about our team and approach at About Us. Let’s work together to transform your vision into reality and turn today’s challenges into tomorrow’s successes.
Leave a Comment