By: Adam Vanlerberghe, Lever Capital Partners
The chatter about the next recession continues to get louder, but the commercial real estate (CRE) investment appetite remains strong and highly liquid. CRE lenders continue to be well capitalized, but their lending parameters have become narrower and they have become more cognisant of ‘downside protection’ in the event of a recession. To do so, lenders may begin to adjust their portfolio’s exposure to market risk in hopes to reduce capital losses that result from significant asset declines.
Lenders are now especially attracted to cash flowing, or near-cash flowing value-add projects. Multifamily and other workforce housing fits this profile and continue to be a popular asset classes for many lenders. Alternatively, lenders have become more conservative with their approach to ground-up development projects, which typically require longer time horizons before generating revenue and realizing value creation. If a recession were to take effect in the next 12 months, as some economists have predicted, they don’t want to be left holding the bag by committing their funds to a development project that might take 18 months or longer to build and lease-up. At Lever Capital Partners, we work to anticipate these lender concerns and can help our clients position their projects to navigate such challenges.
Lenders are also now looking outside of the major markets and gateway cities in search of stronger and more stable economic fundamentals. This notion was further explained by Peter Muoio, Chief Economist at Ten-X Commercial, “In order to gauge the resilience or vulnerability of markets to a potential downturn, it really depends on how high vacancies are and how much development is occurring. That said, we are long into this cycle and property prices have been generally bid up in gateway and major markets, which are typically the first to attract investment earlier in a cycle. This leads investors to search for yield in secondary and tertiary markets.”
At Lever Capital Partners, we are constantly interacting with the commercial real estate lending and investing community which allows us to think like a lender or investor. By doing so we are able to anticipate and mitigate their concerns in order to best capitalize our client’s projects.