Uncertainty lingers, but positive signs point to a rebound
Lending activity has jumped in the last few weeks across the commercial mortgage market, but closing on deals remains challenging.
That’s the assessment Abe Bergman (pictured), president and co-founder of New York-based Eastern Union, provided during a recent telephone interview with Mortgage Professional America.
“Obviously interesting times – the status quo lasts about three hours,” he quipped, referring to the mercurial landscape amid continuing inflation marked by ever-changing interest rates. “It’s really a constantly changing playing field definitely keeping us on our toes.”
Promising developments begin to emerge
In the midst of such uncertainty, however, promising developments over the last few weeks have telegraphed better times ahead, he suggested.
“The most interesting thing we’ve seen really since this all started at the end of the year is a tremendous decline in properties being sold,” he acknowledged, referencing the timeframe the Fed started to increase interest rates in attempts to tame inflation. So far, nine consecutive rates hikes have taken place. “Buyers were uncertain where things are going; sellers - unless they had to sell - were sitting on the sidelines.”
But there appears to be light across the horizon: “Literally the last month or so, we’ve actually seen an increase in deals going into contract.
“Cap rates are up a little bit from what they were two years ago, or a year-and-a-half ago, but we have seen deals go to contract. Just recently we saw a nice-sized transaction go to contract in Harlem – a package of multifamily buildings.”
Which isn’t to say things are easy, he suggested. Lenders are facing uncertainty in the way they structure deals given the current economic climate, Bergman noted.
Yet challenges continue
“On the more challenging side we’re finding that lenders are having a very, very hard time putting out term sheets and committing to deals,” he said. “From talking to a lot of lenders, the crux of the issue isn’t that they’re uncomfortable with the real estate – they know what they want to lend on. The biggest challenge that lenders are telling me they’re facing right now is they simply just don’t know what their cost of funds is going to be going forward – certainly in the short term, and to a certain degree in the long term. That makes it very, very hard for them to price deals. If they price it too high, then the deals don’t work; if they price too low then they’re going to lose money.”
He speaks from personal experience at Eastern Union, Bergman noted. “By us placing the deals, we’re getting them done - but it’s a lot more work that it’s been historically. The simple example I give to people in the office is you’re selling apples and your wholesaler tells you ‘I’ll let you know what I’ll charge you for the apples after you sell them’. That’s the simple explanation, but that’s basically what’s going on.”
It’s not for lack of capital either: “There is a lot of capital, a lot of liquidity in the market,” Bergman said. “It’s trying to get those deals structured that’s been the biggest challenge.’’
Construction costs yield more good news
Another promising development has emerged in the area of construction expenses, he added.
“Construction cost have come down a little bit,” Bergman said. “We are seeing a lot of construction projects. Material costs have come down a little bit. Even total budget items have come down a little bit. It’s still expensive, but that has come down.”
The issue pre-dates the inflation fight by the Fed, dating to the time following the peak of pandemic when supply chain issues emerged, Bergman outlined.
“We’ve had people who were nervous about projects getting delayed because they couldn’t get their electric boxes, right?” he said. “That seems to have fixed itself to a big degree.”
Despite such positive signs, it’s ultimately the uncertainty that’s the consistent thing, Bergman said. While the current market is responding to the central bank’s inflation-busting efforts, it’s the resulting uncertainty that serves to exacerbate. “People still don’t know what the end of the movie is,” he said.
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