M id A tlantic Real Estate Journal — Owners, Developers & Managers — June 2024 — 13A
www.marej.com
O wners , D evelopers & M anagers
By Carlo Batts, MAI, Rittenhouse Appraisals The Ripple Effect: High Interest Rates Alter CMBS Activity
T he middle of 2024 pres- ents a blend of opportu- nities and challenges for
surrounding businesses expe- rience decreased sales. This in turn impacts entire neigh- borhoods and communities, reducing property values and creating financial hardships for owners and employees of the struggling businesses. Other forces include the em- phasis on eco-friendly develop- ment, the upcoming election both here and internationally, and global conflicts. Investment & Financing Trends Mortgage Bankers Associa- tion (MBA) reports traditional
commercial lenders closed $306 billion in commercial real estate loans in 2023, which was 49% of the $595 billion in loans closed in 2022. As banks focus on keeping their existing assets in good health, and not establishing new originations, CMBS (Commercial Mortgage- Backed Securities) has become an attractive alternative for those seeking capital. In 2023 $39.3 billion in CMBS was issued, according to Gantry. The firm anticipates the figure will nearly double in 2024 with $60-70 billion of
CMBS issuance. In juxtaposi- tion, defaults of CMBS are also on the rise, some of which are led by the decline in office properties often included in the CMBS package. Of all CMBS loans maturing by the end of next year, more than half - $75.74 billion - are CMBS loans against office properties. This scenario will require moving underper- forming assets, be it through foreclosure or other tactics. Specifically, as the office mar - ket is experiencing turmoil, it means a necessary shift in this
asset class. In contrast, other sectors including industrial, retail, and multifamily have already adapted to meet new market demands, a process that began prior to the CO- VID-19 pandemic. This trans- formation is neither quick nor confined to a single year, and is expected to linger for the next 10-15 years. Carlo L. Batts, MAI, is the principal of Rittenhouse Appraisals, a regional com- mercial real estate valua- tion firm based in Center City Philadelphia. MAREJ
the commer- cial real es- tate industry. Multifamily, industrial, and retail sectors are doing well, while high interest rates and office va -
Carlo Batts
cancies remain a concern. It’s important to review the trends and factors that have shaped the first half of 2024, and spe - cifically look at a financing alternative gaining traction. To begin, a quick snapshot of current conditions by sector. Sector Specific Insights The national office vacancy rate rose to 19.6% in the fourth quarter of 2023, which sur- passes the previous record of 19.3%. Moody’s Analytics CRE says this is the largest quar- terly increase since Q1 2021. Despite this negative trend, investors continue to pursue prime office locations. While multifamily remains strong overall, there are dif- ferences in housing types. Ac- cording to Moody’s Analytics CRE, the 2023 vacancy rate for B and C class properties was 4.6%. Set in opposition, the vacancy rate for luxury properties was nearly two per- centage points higher at 6.5%. Industrial properties are experiencing high demand and growth, largely driven by the need for warehouses and distri- bution centers. These property types are needed to support e- commerce, which now accounts for 15.6% of retail sales. Despite the rise in e-com- merce sales, traditional brick- and-mortar retail performs well. Groceryanchored neighborhood shopping centers are leading the sector as they typically serve as convenient locations for ev- eryday necessities and services. Major Forces Influencing the Industry Higher interest rates and the lack of a rate cut continue to pressure the ability to se- cure financing or refinance existing loans. But as we’ll dis- cuss shortly, a different loan type is gaining popularity. The persistence of remote work and hybrid models have consequences beyond empty office buildings. With fewer people in those buildings,
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