When interest rates rise, Inflation and rising construction costs, as well as a hybrid work environment, all pose challenges to the commercial real estate industry.
New developments are harder to finance because borrowing costs are higher as well as construction costs. And the post-COVID-19 remote and hybrid work environment has significantly reduced the demand for office space.
To learn how commercial real estate developers and brokers are navigating these challenges, BizTimes Media will be attending the annual Commercial Real Estate and Development Conference on Nov. 17 at the Brookfield Conference Center. We have assembled a panel of experts. Panelists include: Marianne Blish Managing Director of Newland Enterprises Tim Gokman Royal Capital Group Chief Executive Officer kevin newell Chief Operating Officer, Three Leaf Partners Derek Taylor.
Prior to the event, BizTimes Milwaukee asked panelists to answer a series of questions.
BizTimes: How are the commercial real estate capital markets currently impacting your business, especially with rising interest rates?
Blish: “It’s uneven. The prevalence of high interest rates is a concern for building owners with high loan-to-value (LTV) renewal notes, and many lenders are withdrawing from office lending or simply The concern is compounded by the fact that you’re simply putting the pencil down. Typical loan interest rates for new and renewal loans are 7-9%, with a minimum LTV of 60% and often 50% LTV. The situation is further exacerbated by declining building valuations due to rising capital and cap rates.
“We expect more capital calls and foreclosures in 2024. The strong will survive, but weaker borrowers and owners with significant vacancies will be vulnerable. Some casualties in 2023 However, if employers continue to struggle to bring employees back to the office and negative (office) absorption statistics continue to rise, more business owners could jump on the battle bus in 2024. To be expected. Milwaukee is like any other market across the country, but there will still be casualties.”
Goffman: “There are big challenges with rising interest rates and fewer options for capital. While capital is still available for the best projects that make sense, housing production in Milwaukee has declined significantly (in line with national trends).” I think so.”
Newell: “My Capital Markets teammate, Brian Mays, has been actively monitoring and sourcing the markets and has been instrumental in securing funding for the projects at hand. Despite a historically high interest rate environment, we led efforts to secure $40 million in committed capital, including the resident phase of ThriveOn King, which is scheduled to close in November 2023. It’s a success.”
Taylor: “Debt markets have certainly contracted. That being said, through our close relationships with lenders in Wisconsin, we have successfully completed projects such as The Atwater in Shorewood (39 units) and Theater Terrace in Kenosha (71 units). ), The Atwater (39 units), The Atwater (39 units), Fitz on Milwaukee’s east side, partner Michael DeMichele (55 units), Saukville, and soon West Allis (247 units) While the impact of rising interest rates is being felt by our projects and investors, tax increment financing in strong submarkets with development-oriented communities is available. We are also exploring other sources of funding, including life insurance company debt, HUD, debt funds, and other sources that have become more viable as traditional banks exit. ”
What has been keeping you up late lately?
Blish: “1) Telecommuting and hybrid work trends and their increasing impact on office occupancy and thus demand. 2) Domestic and global political risk and the associated economic impact and instability. It is one of the most popular investment destinations in the world due to low or no risk on the ground. Although still very good by comparison, increasing political dysfunction within the country has made decision-making difficult. It adds undesirable uncertainty and is counterproductive to investment and general economic prosperity. 3) (Raising interest rates) further increases the risk of not having a soft landing, but by 50 basis points to 100 basis points per year. A small step back in the points range would likely avoid a significant amount of foreclosure action.”
Goffman: “There’s pressure on our kids to help build a better Milwaukee, and at the same time the domestic and international scope of our timber work is rapidly expanding. Not necessarily in that order. there is no.”
Newell: “The geopolitical environment is in the midst of a level of conflict not seen in some time. This, combined with the Fed’s aggressive domestic policies and upcoming elections, poses significant macroeconomic challenges. If proper guardrails are not properly maintained, significant damage can occur.”
Taylor: “Bonds for new construction will become available in 2024. The Fed’s continued interest rate hikes have forced many traditional banks to the sidelines. My team and I frequently think and strategize about how we approach our lenders.”
Where do you see the biggest opportunities right now?
Blish: “Office bargain hunters are seeking older products with potential for redevelopment, increasing the consideration (or need) for sale-leasebacks across all asset classes, and We have solid leasing going on.”
Goffman: “A lot of wood. And I think Milwaukee can be a leader in the national conversation about urban renewal by continuing to make bold decisions (and investments) in worker housing and public infrastructure.”
Newell: “We believe that with the right public-private partnerships, there is a significant opportunity to stabilize our urban neighborhoods. Mayor (Cavalier) Johnson and County Executive David Crowley are leading the way as we continue to work here in downtown and downtown. We expect to see changes in neighboring areas very similar to those we witnessed in areas close to .”
Taylor: “We recently launched an industrial asset class strategy to acquire value-add assets. We completed our first acquisition at the end of October, and in mid-November we announced a new acquisition opportunity in Wisconsin. These opportunities provide investors with the opportunity to invest in stable assets with long-term in-place leases and annual rent increases combined with future cap rate compression once the economy stabilizes. As we continue to navigate difficult debt markets for new construction opportunities, we believe these assets will create value for investors. We will extend this strategy to multifamily acquisitions in 2024. may also expand.”