Lender Pullback From Commercial Real Estate Lending

At the Bisnow December 8, 2022 D.C. Region Finance and Deal-Makers Summit, major commercial real estate lenders discussed how they are dealing with the current turbulent times. “The pullback is happening across all asset classes, given how this year’s sharp rise in interest rates has dramatically altered the math for new deals. But Ekeroth, Regional Director with Northwestern Mutual,   said it is especially pronounced in office, given that sector’s uncertain demand and high vacancy rates. He said Northwestern Mutual isn’t unloading its office loans, but it also isn’t doubling down with new deals. He acknowledged that many older office assets need substantial upgrades to stay competitive, but banks are unlikely to be the ones financing those renovations.”   I’ve seen other recent reports predicting that office assets will go down in value 15-20%, with gateway cities seeing values dropping by as much as 30%-40% in the coming year. “Colliers international Group Inc.’s most recent investor survey found 55% expect losses for the office sector in 2023, the most negative outlook among property types surveyed”, as reported by the SF Business Times on December 15, 2022.  Where is the good news? I am now hearing of Class A suburban office buildings selling for $150-200/rsf where the replacement cost could be as high as $500-600/rsf. Those investors who keep their powder dry and wait for the market to get towards the bottom. The last time we had this happen, when the Savings & Loan industry imploded, 25% of all our Class A office properties along the I-680 Corridor went into foreclosure, and I had clients picking up Class B garden office properties for $50/rsf! Mostly leased and with lender financing!  It won’t go that low this time, but there may be great bargain investments coming our way…