Considering a series of unforeseen events that have influenced nearly every type of business over the last three years, commercial real estate firms have introduced new protocols, digitized operations, and successfully managed the reopening phase.
As we approach the final quarter of 2023, lingering questions remain: Which transformations and trends will endure in the long run? How will the real estate sector appear one year from today? What new roles is technology playing?
Our Executive Vice President and Director of CRE & Construction Lending, Kirk Malmrose, discusses the 2023 business outlook with L.A. Times B2B Publishing, weighing in on the real estate industry.
You may view the complete article here.
There will be opportunities for well-capitalized investors in 2023 and 2024. Renovation and higher-leveraged term loans made at advantageous rates three to five years ago could face “refinance risk” with higher interest rates and tightened credit markets. Lesser capitalized investors may be pressed into selling assets rather than investing additional equity into a property to refinance and keep the asset—which will apply downward pressure on asset values to benefit investors with strong cash reserves. Current high interest rates and market dynamics are impacting asset classes differently. On one side of the spectrum, multifamily seems to be holding up fairly well with continued expected rate growth and stable occupancy. Conversely, the office market appears to be a slow-moving trainwreck with well-documented increasing vacancies, declining market rents, and significant value declines. Investing in an office at this time isn’t for the faint of heart, but value investors may step in to stabilize the market.
Technology has significantly impacted real estate markets over the last several years. Access to quality data, including rental and sales comps, mapping, and historical records, is at our fingertips, helping investors and lenders make more informed decisions. These tools help market players assess target properties’ economic, physical, and locational attributes quickly. However, all the technology in the world is no substitute for a “boots on the ground” site visit to understand the nuances of a property that may not be reflected in the data. You also can’t undervalue the importance of building a network of “human capital,” i.e., personal relationships.
We’re currently undergoing a seismic shift in how office space will be used in the future. Just as the “dot com” era changed the clothes employees wear to offices to a more casual standard, the pandemic has accelerated changes in how companies use space. There’s evidence some companies may have overshot in giving back space to landlords, who are now releasing back some of it. In my opinion, “hybrid” and “work from home” arrangements are here to stay. I expect larger office space users to continue reducing their footprint over the next five+ years. Office owners must develop strategies to attract and retain tenants in that increasingly competitive market segment. Medical and smaller professional tenants seem to be a bright spot.
Advancing technologies have had a profound influence on how we’re using real estate. Early in my career, restaurants were a more minor part of a retail center’s occupancy. The emergence of e-commerce and changing shopping preferences has supported a greater use for more food, service, and experiential tenants as a percentage of the property.
I recently visited the Amazon Style store in Glendale, where you can walk through a beautiful showroom, scan the items you like, and go to a dressing room where everything you selected is waiting for you to try on. This concept reduces costly showroom space, uses state-of-the-art inventory controls, and creates a more efficient business model. It is also fun.
Landlords need to be ahead of the curve in spotting long-term trends and repositioning their properties to meet demands. In real-time, we’re seeing certain office and mall properties becoming obsolete.
The bank failures early this year sent a shudder through the financial markets. Virtually every financial institution is evaluating the quality and durability of their portfolios. Loans with maturities through the end of 2024 will come off very low-interest rates in the 3.50% to 3.75% range. How well will these loans fare when we see interest rates in the 6.00% to 7.00% range? These higher interest rates sometimes force owners to come to the “refinance table” with cash-in. Underwriting standards are tightening, with lenders seeking higher debt coverage ratios assuming higher interest rates. We’ve seen increased activity from developers seeking construction financing as their existing lenders have exited the market.
This is an exciting time for the real estate industry. Understanding technological advances and changing attitudes, styles, and tastes are crucial to offering a compelling product to tenants. Expect to see more amenities, including rooftop lounges, high-quality common/social areas, building security, reliable high-speed internet, access to vehicle charging, and proximity to entertainment and shopping venues to drive demand in the future.
This article does not constitute legal, accounting or other professional advice. Although the information contained herein is intended to be accurate, Cathay Bank does not assume liability for loss or damage due to reliance on such information.