While inflation has been cooling over the past few months, the Federal Reserve's recent decision to raise the federal funds rate another 25 basis points will continue to impact the overall lending environment, experts say.
According to Alyssa Dangler, attorney and shareholder at Williams Mullen in Norfolk, VA, and the 2023 CREW Network president, the year so far can be summed up in one word: uncertainty. It's an uncertainty that spreads beyond banking and lending to the overall commercial real estate industry. It's leading to difficulties in project financing, with potential regulatory hurdles still on the horizon.
A Year of Continuing Uncertainty
The current malaise has led to interest rate volatility and evaluating assets, which in turn has tightened the availability of credit and rippled across the construction pipeline, according to Dangler. There are deviations based on market and asset class, she says: industrial, for example, has been less challenging as the project pipeline remains robust, whereas multifamily has been "really challenged" by rising rates. But overall, a tightening credit landscape has kept some projects on the sidelines.
"There has been a lot of discussion about whether there will be rate cuts and when they'll commence," she says. "Some believe early 2024; some believe a year from now. But the monetary policies the Fed has enacted will need to be softened, which will in turn also create interest rate fluctuations once again. And that makes it difficult to attract debt and equity investors."
Dangler further notes the industry is bracing for increased tightening over $3 trillion in debt that is set to mature. It was originated when base rates were near zero, and it will be a challenge to refinance.
Project Financing Cited As Top Obstacle to CRE Dealmaking
According to CREW Network's latest CREW View: CRE Women Speak report, 56% of women in commercial real estate said it was more difficult to get deals done in the second quarter, with many citing project financing and lending barriers as the main obstacles to crossing the finish line. Women in the hospitality, multifamily and industrial sectors were very concerned about the dealmaking outlook, while the greatest concern was reserved for the struggling office sector.
Lending headwinds are likely to persist into the latter half of 2023 and into next year, as pricing evaluation remains the biggest challenge to dealmaking. Dangler says it's "very difficult" to price a project, with interest rates rising dramatically over the last 18 months against the simultaneous backdrop of declining asset values.
"There are lower transaction values and less projects available on the market to buy and sell," Dangler says. "And when you combine that with labor issues, it's difficult to meet budget without building in large contingencies."
Regulatory Landscape Poses Concerns
Financial institutions are also bracing for increased regulatory pressure for liquidity requirements, which Dangler says will squeeze developers, ultimately requiring them to "bring that much more equity to the table," she says. But if the regulatory environment would relax to allow banks to restructure debt, "there will be more freedom to work with borrowers."
"Giving banks the freedom to do that will really help from a solvency perspective," says the CREW Network president. "It's critical to allow banks to work with their customers and each other within the regulatory landscape."
For more thought leadership and insights from CREW Network, click here.
© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
