(Bloomberg) — Buyers and sellers of U.S. commercial real estate are increasingly convinced that the beleaguered market is coming to an end.
But the big question remains: at what price will the offices, apartments and other blighted properties actually change?
There are many signs that there will be an answer soon. With prices down 19% from a peak in 2022, the commercial property market is starting to come to life. In part, that's because lenders and landlords want to cut their losses and make new investments now that the Federal Reserve's first rate cut in four years is bringing some clarity to where valuations are.
“There will definitely be more activity in 2025 and it will be a mix of drivers that will lead to significant volatility for some, with some significant opportunities for others,” said David Aviram, co-founder of Maverick Real Estate Partners. . Distressed properties that took on a lot of debt at much lower rates will drive many of the transactions, he said.
Sellers have had to offload properties at steep discounts in recent months. Earlier this year, investors agreed to it BUY an office building in New York City at 67% less than the purchase price in 2018. The former Chicago headquarters of Cboe Global Markets Inc. sold this summer for approx half of its value before the pandemic.
This year's data through July underscores just how difficult the market has been. Transactions fell 5% from a year earlier to $203.8 billion, according to MSCI Inc. But recently, transaction volumes are showing “steady” improvements, the data provider said in a report.
There is still a level of uncertainty lingering in the industry, causing some investors to remain cautious about jumping in too early. Property types such as aging downtown offices were hit particularly hard as telecommuting weighed on tenant demand. Exactly what each property is worth will take some time for buyers and sellers to agree on.
Right now, there are signs that more bidders are looking at property and loan sales. Lender Parkview Financial recently traded about $300 million in apartment and office-related loans in New York, New Jersey and Connecticut. Each loan received multiple bids and bids averaged about 95% of face value, according to chief executive Paul Rahimian.
More companies are also willing to provide loans. An investor seeking to raise $120 million in debt to buy a portfolio of warehouses in Florida received a dozen offers from major banks and insurers, according to Michael Gigliotti, a senior managing director at Jones Lang LaSalle Inc. who is working on the transaction. Three months ago, that type of deal would have gotten four to five offers, he said.
“You're getting the triple whammy: the players, the prices and the indexes are all cooperating,” Gigliotti said. “It seems like a switch has been turned. Everyone seems excited and we're calling it the start of a new cycle of liquidity.”
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Investment titans are preparing to jump in to provide certain loans with higher interest rates than a few years ago. Fortress Investment Group and Goldman Sachs Group Inc. are looking to raise money from investors for new real estate investment funds for commercial property loans. Backed by Elliott Investment Management lender Ascent Developer Solutions said loan demand is double what it was just two or three months ago, according to AscentDS CEO Robert Wasmund.
In the trough
The property market has been largely frozen since 2022, when the Federal Reserve began raising its key interest rate to the highest level in more than two decades. Rising borrowing costs caused real estate valuations to plummet, with many buyers and sellers disagreeing on exactly what many properties are worth.
Central bank rate cut off announced Wednesday is now giving investors more clarity on the future path of interest rates. Richard Barkham, global chief economist and head of Americas research at property broker CBRE Group Inc., said the Fed is likely to cut rates by at least 50 basis points over the rest of this year.
“We're in the trough, and we're looking forward to the upswing” of the broader market, Barkham said on a call Wednesday, adding that there are likely to be different results for different asset classes. “There is still a long way to go to overcome this crisis.”
Many deals are likely driven by some form of concern. While many lenders were willing to lend while the market waited for more clarity, their patience is wearing thin. Borrowers who financed everything from offices to high-end apartments are facing the possibility of large losses as the loans mature.
“You want to be able to be an investor as opposed to being a captive in a piece of real estate where your losses are already too great,” said Darcy Stacom, a founder of Stacom CRE brokerage.
And investors are raising more capital to buy properties. This month, Ares Management Corp. closed a $3.3 billion opportunity fund, the largest closed-end real estate fund ever, to invest in distressed real estate.
“The waiting game is over,” said Ran Eliasaf, founder of investment firm Northwind Group. “The price discovery phase is over and now there is a price reality.”
Moving
Liquidity is coming back in different ways. Madison Realty Capital PROVIDED $2.04 billion in capital commitments for a real estate debt fund. And the commercial market for mortgage-backed securities has rebounded this year, with new issuance rising to $92.5 billion this year through July, up 57% from the same period in 2023, according to the data compiled from Bloomberg.
Until recently, many borrowers sought to provide loans at maturity because the cost of borrowing was high and lenders were reluctant to provide new financing. In a sign that more refinancing capital has become available, four borrowers from Parkview paid off $52 million in loans in the 30 days through Sept. 15, a significant increase in repayments compared to last year, according to CEO Rahimian.
“If there's one thing I'm sure of, it's that we're at the beginning of a new cycle,” he said.
With the market opening up for discharge of old loans, lenders are able to start cleaning up their books and creating new debt. Rahimian said Parkview is in the process of negotiating to close the $300 million loan sale. Once this is complete, the firm can return the money to the market and will look to earn 10% to 12% in the next 12 months between origination and interest fees.
“The sooner you get out and move on, the better,” said Rahimian, who has worked in commercial real estate since 1990. “When the money comes into my pocket, I have to put it to work.”