How Owners Can Mitigate Key Risks Facing the Commercial Real Estate Market in 2024

February 2024

2023 Market Events Set the Stage for 2024

2023 was marked by headwinds in the commercial real estate sector as the Federal Reserve continued quantitative tightening measures through the first half of the year to shrink its balance sheet and remove liquidity from the market. In addition, the Federal Reserve continued to increase short-term rates in 2023, with the last hike taking the Federal Funds range to 5.25% - 5.50% in July 2023. Disruption in the banking system during the first half of 2023 triggered lenders, especially traditional banks, to curtail lending activity and assume a defensive stance. The magnitude of this shift was rapid and represented a significant reduction in credit availability to buyers and owners seeking to roll over existing debt. For context, the Mortgage Bankers Association reported that Q3 2023 commercial originations decreased 49% compared to Q3 2022 (1). Unsurprisingly, CBRE reported that commercial real estate transaction volumes were down by 54% in Q3 2023 compared to Q3 2022 (2).

Key Risks Market Participants Face in 2024

Heading into 2024, many owners face slow rent roll growth, muted leasing activity, and higher-than-projected vacancy rates. These challenges have put pressure on asset values with concentrations of stress in sectors with the weakest operating fundamentals. Although property values have come under pressure, prospective buyers are still having difficulty sourcing deals that meet underwriting criteria. Higher rates are largely to blame as the cost of carrying debt weighs on cash flow projections. Buyers are also incorporating more conservative assumptions into underwriting models to reflect the likelihood that rent roll growth, vacancy, and lease-up timeframes may present ongoing challenges. Industry watchers remain concerned that a maturity wave could force owners to decide between refinancing at meaningfully higher rates or executing asset sales under pressure from impending maturities. According to Trepp, a record $541.2 billion in commercial real estate debt came due in 2023 (3), and the Mortgage Bankers Association projects that $929 billion will come due in 2024 (4). As the volume of maturing debt grows, lenders continue to maintain a risk-averse posture characterized by tighter lending standards, and some lenders remain on the sidelines for asset classes perceived as higher risk. This dynamic has the potential to create further stress in the market later in the year, and investors seeking to complete acquisitions or refinance should be prepared to explore multiple options.

What Should Commercial Real Estate Owners Do to Mitigate Risks?

For many owners, the most significant source of stress in 2024 will stem from impending maturities and uncertainty about the availability of suitable financing options. In response to these concerns, owners should proactively speak with a capital expert who can leverage a deep network of lenders and offer tailored financing solutions to promote satisfactory, ongoing asset performance. Borrowers should leverage a capital expert's experience and knowledge to understand the capital landscape and align assets with optimal financing while considering loan maturities in their entire portfolio. If business plan updates are required to obtain suitable financing, capital advisors can provide insight into operating benchmarks and enhancements that lenders are emphasizing.

Final Thoughts

During periods of reduced capital availability, a mortgage broker is an invaluable resource to asset owners because they bring the experience, knowledge, and network necessary to unlock the widest variety of financing options and design solutions focused on enhancing the success of the asset and the owner’s portfolio. Those fortunate to have a long-standing relationship with a capital expert should lean in and benefit from their familiarity with the portfolio and the unique characteristics of the asset under consideration.