While interest rate hikes have affected the commercial real estate sector, they”™re not all that”™s causing industry concern, according to participants in a panel discussion presented by Fordham University”™s Real Estate Institute. The Institute offers programs leading to various degrees in real estate at Fordham”™s Westchester campus in West Harrison as well as its facilities in Manhattan. Hundreds of business and industry professionals attended the Institute”™s “Rising Interest Rates and the Impact on Commercial Real Estate” event that took place July 26 at Fordham”™s School of Law with both in-person and virtual audiences.
On the panel were Andrea Balkan of Brookfield Asset Management, Adam Doneger of Cushman & Wakefield and Ryan Severino of real estate investment and management firm JLL, which is based in East Rutherford, New Jersey.
Balkan is a managing partner in Brookfield Asset Management”™s Real Estate Group and is responsible for the overall management of Brookfield”™s real estate finance funds. Brookfield reports having $725 billion in assets under management.
Doneger is vice chairman of Cushman & Wakefield, the global real estate services firm.
Severino is chief economist at JLL, a professional services firm specializing in real estate and investment management.
The panel was moderated by Tony Fineman, senior managing director and co-head of national originations at ACORE Capital, which has $19.4 billion in assets under management.
“If you break it down by asset class, the office business, the number-one seller over the last 20 years in New York City, has slowed significantly,” Cushman & Wakefield”™s Doneger said. “Select office trades have been put on pause mainly due to the evaporation of financing across the office spectrum. When financing stops, equity is going to stop alongside it.”
Doneger said that there”™s something quite different happening in the multifamily market where demand for apartments remains strong.
“We”™re having a ton of success in our multifamily practice,” Doneger said.
Balkan said that rising interest rates caused some deals that were not yet finalized to have to be renegotiated.
“It is forcing us to go back to borrowers and say, ”˜Guess what? We”™re going to have to lower proceeds. We may have to change our rates,”™” Balkan said. “There”™s a lot in flux right now. We are still active, we are still lending, but we”™re having to look at every deal with a new lens, look at the forward curve and say, ”˜This loan has to cover its debt service at the forward curve.”™ So, it is resulting in our changing terms on deals, which honestly we haven”™t done in the 20 years I”™ve been there (at Brookfield).”
Doneger said, “What we have seen over the last couple of months has been unprecedented in terms of transaction volume just falling off of a cliff. You really have to segment it by asset class. We all know the challenges with New York City office right now. The office business, which has been the number-one seller or asset class du jour over the last 20-odd years in New York City has really slowed down significantly and all the office trades that were in the market have been put on pause and the debt is fueling the equity, so obviously when financing stops, equity is going to stop alongside it.”
Severino said, “The pace of change has been so dramatic over the last six months that a lot of people are just trying to wrap their minds around what this means. I don”™t often date myself but I”™ve been around the block more times than I usually admit and I say that because in my career I”™ve never seen things change faster than they have in the last six months, both from a macroeconomic point of view and how that has spilled over into the markets.”
Severino said that he does not see a lot of people hitting the panic button but he does see a lot of people trying to grapple with how fast things have changed and the uncertainty associated with that change. He said some people are taking more time than usual when looking at deals, sharpening their pencils, doing more homework and pausing until they can get a handle on what the next quarter or two are going to look like.
“We are in somewhat uncharted waters,” Severino said. “There”™s no good pithy expression to describe the world that we now find ourselves in after 30-plus years of globalization, 10 years removed from the first balance-sheet recession since the Great Depression in the 1930s, the first real global pandemic in 100 years, the first major war in Europe since the end of World War II. You tie that together in an environment where economic growth is slowing down yet we”™re still creating 300,000 to 400,000 jobs per month and consumer spending is at the highest that we”™ve ever seen and there”™s not a good way to summarize what that world looks like. I”™m not surprised that a lot of the industry is taking a beating and trying to assess this.”
Severino said that uncertainty is a paralyzing force both in the real estate industry and the broader economy.
Balkan expressed a view that the differences between average assets and very high-quality assets have become more apparent and important.
“If you look at our Class A+ office, we”™re seeing record leasing at leasing rates that are above prepandemic levels,” Balkan said. “You”™re also going to see that on trophy multifamilies and on almost every trophy asset. On retail, you”™re actually seeing retail improve.”
Severino referred to what he called “massive ramifications” from a global labor shortage not just for the overall economy, but also for where people want to work and live and what kind of industries they want to be in.
“It is going to get objectively interesting in the economy in the real estate markets over the next 10, 15, 20 years as we go from an era of labor abundance to labor scarcity,” Severino said. “Prices of housing, and I mean for-rent and for-sale housing, would not be rising the way they are if we didn”™t have some kind of supply/demand imbalance in the United States. Estimates will vary on how many units we”™re under-supplied, but if you look at the growth in housing over let”™s call it the last 13 years since we came out of the prior recession to where we are today, we are just not developing enough housing relative to underlying demographic change, relative to the increase in the number of households in the United States, relative to the increase in the population in the United States. It”™s kind of Econ 101; if demand is growing faster than supply then the equilibrium price and the economy and that market has to rise and that”™s really what we”™ve seen.”
