Commercial Magazine

Find Ways to Adapt

Originators need to strategize for a changing landscape and uncertain future

By Ryan Walsh

As we near the end of 2023, the global economy finds itself on the precipice of change. With the possibility of at least one more quarter-point rate hike from the Federal Reserve, and the looming possibility of a short and shallow U.S. recession, economists and mortgage professionals alike are bracing themselves for another 12 months of turbulence.

While the future remains murky, there are still issues that may shape the economic landscape going forward and offer opportunities for commercial mortgage originators. When confronted with an environment characterized by rate hikes and economic turbulence, it becomes essential for professionals in this field to adapt and strategize effectively. Remaining well-informed about economic trends, policy decisions and real estate market dynamics is crucial.

Changing landscape

Rising interest rates have presented major issues for the commercial real estate industry. Affordability concerns, decreased property valuations and headwinds for new developments have contributed to a more challenging investment landscape.

Shifting preferences toward alternative investment options, and strains on cash flow and financing efforts, have further compounded the challenges faced by real estate investors in a higher interest rate environment. It is crucial for originators and their clients to carefully analyze market conditions, evaluate the potential impact of interest rate fluctuations, and adapt their strategies to mitigate risks and maximize returns in the current climate.

The commercial real estate industry relies on lending services to keep the market moving. Traditional lending institutions such as banks and credit unions play a vital role in providing individuals and businesses with the necessary capital to purchase properties for both residential and commercial purposes. But due to the recent and drastic increase in interest rates, the landscape of commercial mortgage lending is undergoing a transformative shift, especially for traditional lenders.

When interest rates rise, it becomes more expensive for individuals and businesses to finance real estate purchases. The expected result is that the demand for properties should decrease, leading to a decline in property valuations and creating a buyer’s market across the board.

While this scenario has occurred in some areas of the country, buyers may be more hesitant to invest in real estate, which can also contribute to a slowdown in the market and put downward pressure on property prices. This situation can present challenges for existing real estate owners, who may have trouble selling their properties at desired prices or face declines in the values of their investment portfolios.

Real consequences

Higher interest rates have had a significant impact on new real estate development projects as well. Developers often rely on financing from banks and other sources to fund their projects.

As interest rates increase, borrowing costs for developers rise, making it more expensive to secure financing. This has resulted in a slowdown in new construction, fewer new projects being initiated and a potential decrease in the housing supply. A decline in real estate development activity can further exacerbate the issue of housing affordability and limit investment opportunities.

In a rising interest rate environment, some investors may opt to shift their money away from real estate and toward alternative options. Higher interest rates can make other investment vehicles (such as fixed-income securities, bonds or money market funds) more appealing due to their comparatively lower risk and potentially higher returns. This shift in investor preferences, especially when private money is involved, is reducing real estate activity and leading to a slowdown across many markets.

Foreclosures are also on the rise. Borrowers with variable-rate mortgages are experiencing an increase in their monthly payments. This can put pressure on cash flow, particularly if rental income remains stagnant or does not keep pace with the rising costs to borrow. Investors are reassessing their business strategies, but for some it may be too late if they can’t get the increased rent to mitigate the impact of a higher interest rate on their cash flow.

One of the key factors that influence future economic expectations is the likelihood of further rate hikes. Central banks around the world, concerned about inflationary pressures, are expected to continue tightening their monetary policy. This could lead to increased borrowing costs for individuals and businesses alike, with potential impacts to consumption and investment activities.

While rate hikes may help curb inflation, they also pose risks to economic growth and financial stability. The possibility of a minor recession remains a topic of discussion among economists. While recessions are a natural part of economic cycles, their timing and severity are uncertain. The concerns stem from factors such as geopolitical tensions, trade disputes and structural vulnerabilities within certain business sectors. But it’s important to note that economic forecasts are not infallible, and the resilience and adaptability of economies can often defy expectations.

Potential solutions

Next year promises to be filled with many of the same uncertainties, challenges and opportunities. The prospect of further rate increases and the potential for a recession are ongoing concerns. Whether or not rate hikes and economic turbulence continue, it remains essential for commercial mortgage originators to adapt and strategize.

Understanding current economic trends, policy decisions and market dynamics will be crucial. Follow reputable sources of financial news, attend industry conferences and engage with professional networks to gain insights. By staying ahead of the curve, originators can anticipate changes in interest rates, lending policies and market conditions. This knowledge equips them to make informed decisions and adapt their strategies accordingly.

For some mortgage brokers, this change can seem quite daunting. The reality is that these shifts are usually the best time to grow your business for the future, as it’s all about capturing market share right now. Sales are currently down in terms of volume, but they won’t stay that way forever.

Originators need to get their names in front of customers now more than ever. Instead of pulling back on marketing expenses, try doubling or tripling your lead-generation efforts and budget. Get creative and find ways to be in front of people. If originators aren’t brainstorming for at least an hour a week about how to connect with new or existing customers, they aren’t putting enough effort into marketing.

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Many potential investors are sitting on the sidelines or waiting for good deals. If the name of their originator is not the first thing an investor thinks of when they’re ready to get back in the game, then these originators have done themselves a disservice. This is the time to reengage any contacts from the past. Follow-ups, check-ins, and genuine care for past clients or potential customers can keep the pulse of your business going.

When COVID-19 struck, real estate agents and originators had to change and find new ways to meet their clients’ needs. Something similar is happening today. Even as liquidity in the market shrinks, there still are deals being funded. Make sure you’re the one funding them. ●


  • Ryan Walsh

    Ryan Walsh is a managing partner at the Greater New York City-based Hard Money Bankers and is an entrepreneur of multiple successful companies. He originally used private money to expand his own enterprise, then realized the importance of private money for growing businesses more quickly and easily.

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