Commercial Magazine

Green Shoots for a Struggling Industry

The economic cycle for commercial real estate may be looking up

By Adam S. Finkel

Economic cycles play a key role in determining how markets function, are perceived and ultimately perform. The ebbs and flows of these cycles impact commercial real estate lenders, borrowers and brokers who closely monitor where the market is heading to determine what strategies to deploy, or which investment decisions are best aligned with a particular moment in a cycle.

Determining the perfect time to make a move is challenging because the market operates independently, creating mini-cycles that may impact regional markets and micro-cycles that affect each city. Remarkably, the U.S. economic performance defied expectations in 2023. Economists and market participants sensed a recession was around every corner, but the economy grew at a faster rate than it did in 2022. That resiliency came despite the elevated inflation and interest rates, which have worked to dampen economic growth in the past.

The labor market remained remarkably strong and consumer spending was higher than expected. Companies made investments in equipment and technology for future expansion and spending by the federal government helped support economic growth. Declining mortgage rates at the close of the year helped boost the housing market. Those factors helped generate significant momentum for the U.S. economy into 2024.

A difficult year

Despite those positive factors for the overall economy, commercial real estate markets struggled, and there were profound implications for lending markets. Commercial and multifamily mortgage loan originations were down 25% year-over-year in the fourth quarter of 2023. However, lending was up 13% from the third quarter of 2023, according to the quarterly survey of originations from the Mortgage Bankers Association (MBA).

Despite those positive factors for the overall economy, commercial real estate markets struggled, and there were profound implications for lending markets.

Jamie Woodwell, MBA’s head of commercial real estate research, said that despite the usual small pickup in activity in the fourth quarter, 2023’s U.S. mortgage originations were about 50% below 2022 levels, with every major property type and capital source experiencing a decline. Researchers at CBRE reported that global commercial real estate investment volume fell by 37% year over year in the fourth quarter of 2023 to $157 billion. The commercial real estate services company reported that the annual volume for 2023 also experienced a significant decline, falling by 47% year-over-year to $647 billion.

Resilience amid uncertainty

While apprehensions abound, there’s a consensus that a major wave of distress isn’t imminent. The balance in supply and demand across most asset classes, especially in multifamily, hints at underlying strength.

Yes, there are pockets of challenges, but also opportunities for savvy investors. Interest rates fluctuated considerably last year. As the market braced for prolonged high rates, there was a dip towards the end of 2023. In Q1 2024, the rates have climbed again, reinstating the uncertainty that shadows predictions.

Today’s commercial real estate financing environment is a complex landscape where banks must navigate tighter capital requirements, and yet, the appetite for deploying capital remains robust. There has been an increasing interest in multifamily, industrial, and single-family build-to-rent sectors, with retail and self-storage also gaining traction among many lenders.  The retail sector is showing great improvement and is thriving in selective areas, such as the Sun Belt region. There is very little retail construction taking place, which has led to low vacancy rates in retail centers. The office sector, of course, is facing the most distress, especially in major central business districts, such as New York City.

The general sentiment concerning commercial real estate is optimistic, despite office properties facing ongoing challenges.

The general sentiment concerning commercial real estate is optimistic, despite office properties facing ongoing challenges. That is especially true with the anticipation of transactional activity picking up in the latter half of the year. Interest rates are expected to see a slight decline by year-end, offering even more hope in a tight market.

While challenges persist in sourcing preferred/mezzanine financing below $5 million, the landscape for non-recourse construction and bridge loans remains dynamic. This is particularly true for projects in the Sun Belt states, where there’s been positive job and population momentum, underscoring a regional focus that prioritizes growth and resilience.

Adaptive lending practices

Lenders are continuing to play it safe, often preferring to extend loans rather than reclaim assets. There’s a cautious optimism, buoyed by the presence of well-capitalized investors ready to scoop up distressed assets. Although there’s substantial capital raised for distressed assets, the market is still in a wait-and-see mode.

CBRE’s latest research confirms that the commercial lending market showed signs of stabilization at the end of 2023. Borrowing costs appeared to have peaked, even as transaction activity remained subdued. The CBRE Lending Momentum Index, which tracks the pace of CBRE-originated commercial loan closings in the U.S., increased by 1.0% between the third and fourth quarter of 2023, marking the first quarterly increase since the first quarter of 2022. Still, the index declined by 38.1%, compared to the strong loan volume of the fourth quarter of 2022.

Lending conditions continue to present challenges, but CBRE experts see a brighter future for specific asset classes. They expect material declines in credit spreads in liquid markets, lower trading bands for benchmarks and a reset of cap rates at higher levels. Coupled with the Federal Reserve’s indications that interest rate cuts were on the horizon, it is shaping up to be a more favorable environment, which should translate into higher deal volume.

Banks remain the largest contributors to CBRE’s non-agency loan closings for the seventh consecutive quarter, accounting for 39.5% of the total in last year’s fourth quarter, up from 38.4% in the third quarter. Floating rate loans contributed about a third of the quarter’s loan volume, with 38% allocated to refinancings and the remainder supporting property acquisitions.

CBRE also reported that alternative lenders, such as debt funds and mortgage REITs, represented 30% of the fourth quarter loan volume, up from 27.4% in the third quarter 2023. Multifamily assets remained the preferred property type. 

Cautiously optimistic

The market is still in a price discovery phase, with a wide bid-ask spread. Yet, there’s an eagerness to close this gap as more transactions materialize. Equity groups remain prudent, awaiting clearer market signals and the financing landscape is expected to experience more availability in debt and equity financing this year, with borrowers likely leveraging rate buy-downs for increased financial leverage for Agency and CMBS loans.

Market sentiment heading into the second quarter of 2024 could best be characterized as cautiously optimistic. Many financing advisers are expecting a year of increased transactions, with opportunities for those ready to navigate the complexities of an ever-evolving lending landscape. The expectation is that clarity about the economic picture will bring stability to the capital markets and give lenders confidence to get capital into borrowers’ hands.


  • Adam S. Finkel

    Adam S. Finkel is the co-founder of Tower Capital, a Phoenix-based commercial real estate finance company that provides customized capital-market solutions for real estate owners, operators and investors throughout the country. Finkel has completed more than $1 billion in successful debt and equity placements on behalf of his clients. 

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