If Commercial Real Estate Investment Has Bottomed Out, It Could Take As Long As Two Years To Recover

The Federal Reserve has raised interest rates 10 times since March 2022, insurance rates in some states have more than doubled, many banks have no cash to lend and for many commercial real estate (CRE) investors, balloon payments are coming due. 

Many point to the recession of 2008 being a much worse environment than the one the U.S. is currently experiencing. Still, some point to the pandemic years as having a more negative impact because no one knew when it would end. But in today's economic environment, some believe they know when the CRE market will hit bottom. 

"We're hitting bottom now," Billy Meyer, managing director of Seattle-based Columbia Pacific Advisors, told Benzinga. Columbia, which Meyer says has $2 billion in lending and property on its books, warns that even though CRE investment has hit the floor, it could be a long time before it gets up again. 

"This economic shift is far less scary than during COVID times. During the pandemic, we didn't have the ability to predict the ramifications of what was happening and didn't know how long it was going to last," Meyer said. "This time my guess is it will be all of 18 to 24 months before we see a change. Things are going to be stagnant for a while." 

According to a Moody Analytics study published this year, nearly $1.4 trillion of commercial mortgages are set to mature this year and next. And with the Fed poised to deliver two more rate hikes before the end of the year, the bottom looks pretty grim. 

"Most market participants are aware of the coming wall of maturities in commercial mortgage loans," Moody's said. "Compounded with rising interest rates, lending capacity issues and tightening credit conditions, this poses significant challenges." 

Small banks are struggling to replenish their customer savings base while holding 70% of CRE loans leading to the last two years being good for those companies offering alternative funding sources. 

"When markets are good or challenged, people always need money and bridge loans as well as short-term money. When markets are shifting like now, that is when the demand for short-term money increases," Meyer said. "The fact that banks own X percentage of CRE loans is irrelevant to someone like us." 

Columbia Pacific group reports one of the most active years in the company's history with requests for construction, recapitalization and repositioning financing. 

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One thing everyone agrees with is that CRE investment, especially in multifamily and office space, has slowed to a crawl. Jonathan Needell, president and chief investment officer of Kairos Investment Management Company, told Connect CRE that many investors in that space are waiting things out, believing they're not missing out on much right now. 

"Most of the investors I've talked to are waiting to see what will happen," he said. "They don't know if interest rates will remain steady for the next 12 to 18 months or will start to decrease by the end of the year."

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