The commercial real estate lending landscape has changed drastically in the past 12 months. Many investors speak of the 2021–2022 debt market as if they’re reminiscing on their youth and what once was. Times have changed, and structuring financing takes a lot more work and creativity to get a project across the finish line today than it did in the past: A tough deal often requires contacting 40–50 lending sources to get to a quote that works for the client. Two years ago, money was much more abundant.
Colliers U.S. capital markets 2023 Q2 research shows a decrease in the overall real estate volume of $77.5 billion. This is a 64 percent drop year-over-year. Research also shows monthly volume has increased in consecutive months, indicating investment sales may have found a bottom. Finally, multifamily leads in total volume, but it shows the largest year-over-year volume decline.
The market is in a downward cycle; however, that may not be a bad thing in the long run. An underlying investment strategy remains consistent across most clients, ranging globally from professional athletes, billionaires, and family offices, to large public companies looking to restructure their corporate debt or grow their portfolio. In speaking with all of them, the one thing that remains consistent is that most of them made their money in the down times—not at the market’s peak.
These successful individuals and companies might have sold their property at the top of the market, but they had to buy the deal low to make that money when the time was right. Many bought assets when the market was in turmoil or on the rise and prices were lower. There have been multiple occasions where real estate investors grew their net worth by $20–30 million or more in an upward cycle, so it’s very possible with the proper guidance. Many investors today are flush with capital but are sitting on the sidelines, waiting for cap rates to catch up to interest rates. In the last month or two, the delta between buyers and sellers has been much smaller, and deals are starting to have positive leverage again.
Prices need to adjust to the new rates, and they are starting to do so. The problem has been that the Fed raised rates so quickly, there was no way to know where they would normalize. We seem to be hitting the top of the rate hikes: We saw another hike at the end of July, and maybe we will see one or two more at our current state of the economy, but I can’t imagine much beyond that.
If we are here to help clients navigate the challenging markets and can creatively get deals done when it’s hard, they know we will be there for them in easier markets when liquidity is flowing more freely. I advise every investor to buy smart and look for deals that make sense today, not deals that made sense a year ago. What you pay for an asset today is based on the market at the time—a different landscape than a few years ago. It is taking longer for deals to come together, but deals are getting done, and our role is crucial. I’m confident that savvy investors will make a lot of money during this cycle if they know where to look.
Shawn Givens is vice chairman at Colliers Dallas-Fort Worth