The commercial real estate (CRE) market is recalibrating. Over the last 12-18 months, we’ve seen a reset in market-based interest rates and pricing. As a result of this recalibration, commercial real estate organizations need updated cashflow and debt management strategies to predict, manage, and act on their portfolio’s performance. After all, a solid strategy can help drive your returns and protect the promote.
We partnered with Wealth Management Real Estate (WMRE) for a webinar about Optimizing CRE Debt in a Changing and Unpredictable Market. Speakers Anne Hollander, Chief Strategy Officer at Thirty Capital, Jeff Lee, Managing Partner at Thirty Capital Financial, and Zach Haptonstall, CEO and Co-Founder of Rise48 Equity, candidly discussed the state of the current CRE market and the role debt management plays in a top-performing portfolio.
Watch the webinar to hear the full conversation. Or, read ahead for some highlights from the discussion.
What Is CRE Debt Management?
Commercial real estate debt is money that is provided to purchase, refinance, or construct commercial real estate assets. Each deal is unique and tailored to the needs of the borrower.
Commercial real estate debt management refers to the process of effectively managing and strategizing the debt associated with commercial real estate properties. It involves overseeing and optimizing the financial obligations related to acquiring, refinancing, and maintaining commercial properties.
Economic Factors Impacting CRE Debt Management
Today, four major economic factors are impacting debt: interest rate volatility, organic rent growth, insurance and property taxes, and national bank collapses.
Factor #1: Interest Rate Increases in the Modern Era
In March 2022, The Fed began its aggressive interest rate hikes. Since then, there has been an increase of about 500 basis points. This is the most drastic interest rate spike over a short period of time that we’d seen since the 1980s. As a result of the rapid interest rate growth, multifamily values are anywhere from 20-30% less than what they were in the first half of last year. Multifamily values have decreased primarily because the more expensive that debt becomes, the less purchasing power buyers have.
Chart 1 below shows interest rate growth over the past five years.
Source: Thirty Capital Performance Group
Factor #2: Organic Rent Growth Cooling Across Asset Types
In the last five to seven years, you could buy a deal, call it a value-add, take no action and still experience organic rent growth. But today, organic rent growth is cooling across all asset types. Said Zach Haptonstall, “If you’re a value-add operator and can’t renovate units on schedule and on budget, you’re in big trouble because the rents are not increasing organically.” Zach’s strategy to combat cooling organic rent growth is to raise more cash upfront so that he can handle renovations and essentially force appreciation.
Chart 2 below shows the percentage change of rent growth over four quarters since 2000.
Source: CoStar, Nareit
Factor #3: Insurance and Property Taxes Stressing NOI and Cash
Increases in insurance costs across multifamily properties are also impacting deals. There has been a 42% year-over-year increase in insurance. Some CRE owners may be forced to choose between a capital call to cover the premium costs or greatly reducing casualty coverage on the asset. Specifically in the Texas market, Zach and his team are seeing “upwards of 30-40% insurance increases year over year”.
Chart 3 below shows expense growth for each line item by percentage.
Chart 3: Expense Growth by Percentage
Source: Thirty Capital Performance Group
Factor #4: Regional Bank Concerns Tighten Lending Requirements and Visibility
Recently, three regional banks failed: Silicon Valley Bank (SVB) and Signature Bank both in March 2023 and First Republic Bank in May 2023. Amidst these bank collapses, concerns about regional banks’ viability in these market dynamics have risen. Now, lending requirements are tightening and requests for more visibility are increasing. Regional bank failures are another indicator of an impending recession that will further impact how we think about and manage debt
Watch the on-demand webinar, Optimizing CRE Debt in a Changing and Unpredictable Market, to hear the full conversation. Click here to watch.
How Thirty Capital Can Help
Thirty Capital is a mid-market CRE advisory & investment firm focused at the intersection of real estate, capital markets, and technology. With more than 20 years of experience in the world of commercial real estate, our team understands every operational & financial lever that drives efficiency in a real estate asset, portfolio, and investment.
We can help you model asset, debt, and equity forecasts to determine optimal timing for operational improvement, refinance, or other action so that you stay ahead of the market.
Connect with our team to learn about our detailed analysis and reports.