CRE Development May Be Down But The Deals That 'Pencil' Are Still Being Made

Legions of epitaphs have been written relating to commercial real estate (CRE) investment and development in 2023. But despite the gloom and doom, deals are still being made and they aren't all cash-only.  

Case in point is Miami-based private real estate lender BridgeInvest's announcement this week that it closed on a $30.5 million deal to finance Clairmont Crest, a 213-unit multifamily property in Decatur, Georgia, as well as a $50 million construction loan for the Revv Hollywood multifamily property coming to Hollywood, Florida, located between Fort Lauderdale and Miami. 

BridgeInvest Managing Partner Alex Horn says developers focusing on whether a CRE project makes sense financially in the long term are forging ahead — despite high interest and insurance rates. 

"The question is, does the project pencil," Horn told Benzinga. "The deals we don't want are those when borrowers are projecting that rates will come down and only profit when that happens. The borrowers we're working with now know the rates are going to stay high, but the projects themselves make sense." 

 As has been well-documented, the CRE industry has had to weather 11 interest rate hikes since early 2022, with the Federal Funds rate going from zero to 5.25%. As a result, the average CRE property's value has slid by nearly 25% because of the higher cost of capital. 

"Values may have dropped, but we're seeing a little more stabilization with the values not changing in the past three months," Horn said. "Remember that these rate drops are from a high peak in 2021 and 2022 that created this situation. However, the deals we're working on make sense, but there's less of them."  

While some like to point to the current state of CRE as mirroring somewhat the scenario during the mid-2000s recession, when values were down by half, the consensus is that the industry will not crash.  

"There's still a lot of cash in the system compared to 2008 when there was no liquidity," Horn said. "There's more a focus now on the commercial than the residential side because more than 80% of Americans have their mortgage debt at interest rates below 5%."

According to the Mortgage Bankers Association of America, there are $4.5 trillion in CRE loans outstanding, which accounts for 2% of the $90 billion in total loans outstanding.  

Horn says the debt and interest rate numbers can't be looked at today like they have been historically. 

"Higher interest rates used to award the investor, but today's reality is that we have low unemployment and investors with a lot of assets they're losing money on because of depreciating value," Horn said. "What this market has done is reward the person who is working and penalizing the investor." 

Read next:

• Elon Musk Is Bullish On Austin. Here’s How To Invest In The City’s Growth Before He Floods It With New Tech Workers
• Blackstone Bet $13 Billion On The Impending Student Housing Price Surge. These Investors Are Doing The Same With $500
• This REIT You’ve Never Heard Of Is Crushing The Market – Up 36% Over The Past Two Years