Capital Drought: Unveiling the Squeeze in Commercial Real Estate Finance

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Episode Transcript:

In the world of commercial real estate finance, where an echo of uncertainty and a drought of capital are making their presence felt across the industry.

Data from Trepp, as reported by The Wall Street Journal, highlights a staggering decline in commercial mortgage-backed securities issuance, registering a meager $28.2 billion so far this year. Simultaneously, property purchases in the third quarter saw a dramatic slump of 53%, totaling about $89 billion, according to MSCI Real Assets.

Vornado Realty Trust’s CEO, Steven Roth, candidly painted the grim picture during the company's third-quarter earnings call, stating, "Capital is scarce and backbreakingly expensive."

This lending lull stems from the Federal Reserve’s hike in interest rates, creating a palpable decline in loan volumes and property transactions. Commercial lenders, including banks and insurance companies, have significantly tightened their lending reins, contributing to the drought of capital available in the market.

The scarcity of capital is hitting the construction sector hard. Dodge Construction Network estimates a significant 17% year-over-year decline, with only 935 million square feet of new projects set to kick off this year. It marks the most substantial drop since 2009.

The sentiment seems universal, as Michael Levy, CEO of Crow Holdings, also highlighted the crushing effect of this capital market malaise, underlining the widespread impact of the prevailing financial climate.

Investment and fundraising in the real estate sector are equally impacted. Preqin data, as reported by Bloomberg, reveals a stark reality: a mere $18 billion was raised across 61 funds globally in the third quarter, marking a staggering 71% decline from the previous quarter. This trend aligns with the Federal Reserve's interest rate hikes, marking the slowest rate of fund closures since this financial shift.

However, it's important to note that the situation, as dire as it seems, hasn’t plunged into a crisis akin to the cataclysm of 2008, as James Muhlfeld, Managing Director at Eastdil Secured, indicated to The Wall Street Journal. Unlike the Great Recession, there are still financial exchanges happening, but the terms are stricter. Lenders are exercising more caution, scrutinizing borrowers closely, and demanding higher prices to hedge against risks.

Notably, regional banks, alarmed by a surge in nonperforming commercial real estate loans, are retreating, creating an opening for alternative lending sources like debt funds. Yet, even these groups face a challenge in raising capital, according to The Wall Street Journal.

“There is liquidity available," Muhlfeld acknowledged. "But it's likely going to be more expensive, with lower leverage and with a different lender."

This overarching environment reflects a time of caution, scrutiny, and higher financial thresholds as the industry grapples with the scarcity and costliness of available capital in the commercial real estate market.

This is Tyler Cauble signing off.