BROADCASTS.com

The commercial real estate market is in for a rough ride this year. Many mortgages become due in 2023, and refinancing could be impossible for some property owners because of high interest rates. That situation is expected to shake things up a bit, and lead to more defaults, subleasing, and vacancies. As a MarketWatch headline suggests: \u201cThe party is over in commercial real estate.\u201d (1) \xa0 Hi, I'm Kathy Fettke and this is Real Estate News for Investors. If you like our podcast, please subscribe and leave us a review. \xa0 Lenders say there\u2019s an estimated $450 billion worth of commercial real estate loans coming due within the next four years. Property owners will be forced to refinance at much higher interest rates, for properties that may have also lost value. It\u2019s a double whammy that could result in property sales and/or bankruptcies. \xa0 Higher Rates & Lower Valuations \xa0 And that\u2019s not including a decline in lease renewals, which is already happening. You may have seen headlines about some of the big tech companies cutting down on their square footage \u2013 companies like Amazon, Meta, and Salesforce. \xa0 According to Western Asset Management\u2019s Greg Handler: \u201cYou had all these large tech companies signing big new leases, which was getting the market comfortable with the idea that the office sector was going to recover over the long term.\u201d But with many companies retreating, Handler says there are big questions as to \u201cwho is going to pick up the extra square feet, and at what price.\u201d \xa0 As MarketWatch reports: \u201cLandlords tend to default when debt comes due and financing dries up, a situation that can be exacerbated when a property\u2019s cash flows or valuation falls.\u201d Bank of America\u2019s Alan Todd says of the situation: \u201cIf you\u2019re in a property where valuations are lower (and) your rate is significantly higher, how are you doing to refinance successfully?\u201d \xa0 CRE Price Growth Slows, but Positive \xa0 Commercial property prices haven't dropped significantly yet. One index mentioned in the MarketWatch article says they are still up 7.3% for the year, and 123.5% from 10 years ago. But Todd at BofA thinks they could be headed lower by as much as 20 to 30%. He says: \u201cYou\u2019re talking about a secular, not cyclical, change for certain property types, whether those are regional malls or some of the lower quality offices. Some of those could be fairly problematic.\u201d \xa0 Steve Madura of Illinois\u2019 Hilco Real Estate offered a much bleaker forecast for commercial real estate in a Bisnow article. His company specializes in distressed assets, and he says the need for companies to repay or refinance mortgages will lead to a so-called \u201creckoning\u201d that will (quote) \u201cdwarf the 2008 financial collapse.\u201d (2) \xa0 Madura is calling the mix of high interest rates and a frozen capital market a \u201cdistress bubble.\u201d He says distress is happening sooner than expected, and the impact could ripple through the market. As more and more borrowers face the need for refinancing, we may see more of them heading for the exit.\xa0 \xa0 Distress Creates Investing Opportunities \xa0 Of course, that kind of distress creates investing opportunities, but Madura sees it as potentially too much of a good thing. He says: \u201cThere are huge rows of office buildings in Chicago with 50% vacancy rates. Do you want to convert that many office buildings to residential? That only goes so far.\u201d \xa0 That doesn\u2019t mean commercial investors should ignore office space. Real estate strategist Andy Graiser says that some investors believe they should wait for a better deal later this year, but he says it might be wise to grab a deal now if it\u2019s a good property, and the numbers make sense.\xa0 He says: \u201cThe demand is out there.\u201d\xa0 \xa0 Oxford Economics expects somewhat of a downturn. Its research shows a (negative) -2.2% total return for commercial real estate in 2023. In 2022, that figure was a (positive) 4.2%. The retail and hotel sectors are expected to be the only ones that will end the year with a positive total of 1.8% and 1.2% respectively. A decline of 5% is expected for residential property. (3) \xa0 Reshuffling of Real Estate Fortunes \xa0 Although real estate experts anticipate another difficult year for commercial properties, they are also seeing the beginning of a reshuffling of real estate fortunes. Bei Capital founder Collin Lau told Bisnow that he expects interest rates to peak, plateau, or potentially decline in the first quarter.\xa0 He says: \u201cAs interest rates start to normalize, that will bring investors back to the market.\u201d

The Bisnow article goes into more depth on the topic. You can reference that article and the others mentioned int this podcast in the show notes at newsforinvestors.com.

Our plan at Real Wealth is to wait until commercial property values find their floor, as we believe values are still uncertain and in some cases, a free fall. We expect to be more active in underwriting commercial property sometime in mid to late 2023.

Meantime, we are focused on acquiring single-family homes in both cash flow and growth markets. With interest rates up, fewer people can afford to buy a home but still want to live in one. The demand for renters is strong, yet competition among buyers is low. Sellers are discounting prices and even paying points to buy down the rates, increasing cash flows. This is also why we are focused on building our single-family rental fund, that has an 8% target return with very conservative underwriting. You can find out more at GrowDevelopments.com.\xa0

And if you want to build your rental portfolio, visit newsforinvestors.com where you will get data on the strongest rental and growth markets nationwide, along with referrals to experienced brokers and property managers in those markets that come highly recommended by RealWealth's over 66,000 members.\xa0 \xa0 Thanks for listening! \xa0 Links: \xa0 1 - https://www.marketwatch.com/story/the-party-is-over-in-commercial-real-estate-heres-what-to-expect-in-2023-11671711842 \xa0 2 - https://www.bisnow.com/national/news/top-talent/distressed-asset-specialists-see-deals-in-reckoning-that-dwarfs-08-collapse-116944?utm_source=outbound_pub_58&utm_campaign=outbound_issue_63533&utm_content=link&utm_medium=email \xa0 3 - https://www.bisnow.com/london/news/capital-markets/youre-probably-going-to-lose-money-in-2023-but-theres-light-at-the-end-of-the-tunnel-116993