Despite continuing doom and gloom, the sector is remaining resilient
Plenty of storm clouds have engulfed the commercial real estate market in recent years – but is there cause for optimism in the sector’s future?
While speculation about a potential commercial crash has refused to fade, an uptick in both deal and capital raising activity in 2024 suggests that remains an unlikely prospect, according to the co-chair of global real estate practice at a leading law firm.
Diana Brummer (pictured), of Goodwin, told Mortgage Professional America that the trend indicated continued appetite for deals on the commercial side.
Even in so-called “bad news” deals, the parties involved are beginning to conclude that the time is right to resolve the situation, she said, even if they’re not happy with the reason for transacting. “It might be a short sale where the property was underwater and the borrower wasn’t sure that they should go forward with a short sale,” she explained, “or the lender wasn’t sure if they should approve one because they weren’t sure that market conditions were such that they would be maximizing value [but] recognized that they weren’t going to get paid in full.”
The floodgates have hardly opened as far as transaction volume goes in the market overall, Brummer said – but market participants appear to feel “more comfortable” with pricing in the current landscape.
While certain smaller markets in the US may be seeing well-publicized oversupply in the multifamily space, that’s not the case in major metropolitan areas where there remains “huge appetite”, Brummer said, among many clients.
Lenders are showing strong interest in lending in multifamily construction, she added – “particularly in major urban markets where there are local tax schemes that reward developers for having a component of affordable housing or things like that.”
Melissa Tubau of Lock It Lending notes that many potential buyers are holding off, waiting for even lower rates, but warns that timing the market perfectly is nearly impossible and could lead to increased competition and higher home prices.
— Mortgage Professional America Magazine (@MPAMagazineUS) September 4, 2024
Read more: https://t.co/4BO3di5oWk
What’s in store for the beleaguered office space?
The office market is often cited as the most problematic segment of the commercial real estate space, but while prospects for so-called Class B and Class C – average or functional – offices may be uncertain, the top-tier Class A buildings are likely to remain in demand, according to Brummer, moving forward.
Office-to-residential conversions could grow in popularity although that can be an expensive process, potentially requiring a government tax scheme or break to bridge the gap for interested investors or builders.
Still, finding ways to reduce the amount of empty space in city centres is crucial, Brummer said. “I think it’s hugely important for CBD [central business district] areas not to have what people sometimes call zombie buildings,” she said. “It’s good for the community, it’s good for the tax base locally. It’s good from a cultural perspective and the community fabric.
“So I hope that more public agencies are going to get involved to come up with schemes that really help private industry implement those changes.”
Post-GFC reforms help ease market woes
In the wake of the global financial crisis (GFC) in 2007-08, regulators introduced reforms requiring securitized lenders to monitor developments with the riskiest pieces of their portfolio – measures that Brummer says helped bring down mortgage lending’s overall risk profile.
Borrowers needing to have more equity in the property gave them more “skin in the game” and made them more amenable to working something out when things went sour, while lenders were no longer overly eager to foreclose because it was clear no equity remained. “People have really been working things out more than just rushing to foreclose,” Brummer said.
As for the prospect of a crash? “I feel like it’s been a weak market for two years,” she said. “What would we crash to? For me, it’s really just a matter of whether it’s going to stay like this, or is it going to go up? I don’t really see, based on input from my partners and clients, a prospect of any significant decline from here.”
Make sure to get all the latest news to your inbox on Canada’s mortgage and housing markets by signing up for our free daily newsletter here.
