Clouds Are Gathering on the Horizon for CRE Investors

There is a lot of money chasing real estate.

The amount of equity in the market, some of which has turned into debt, has put added pressure on conventional lenders. But Brian Stoffers, global president of debt and structured finance for Capital Markets at CBRE, doesn’t see lenders making irresponsible loans.

“There is so much equity out there,” says Brian Stoffers, global president of debt and structured finance for Capital Markets at CBRE. “I think that lenders are making good loans today, but they are getting beat up on price.”

For Stoffers, there are much bigger threats on the horizon. With costs increasing and even some issues with insurance, construction volumes could be an issue.

“The construction pipeline has slowed quite a bit, although we’ve done a ton of construction financing,” Stoffers says. “In the first quarter, our construction financing was way up.”

But for Stoffers the more significant concerns aren’t necessarily issues caused by real estate lending, borrowing or underwriting. They’re caused by government policy.

“What concerns me are factors outside of real estate directly, including the tax proposals that are being discussed—the potential elimination of 1031 and the increase in capital gains,” Stoffers says. “Those are bigger threats than anything directly real estate related, in my opinion.”

Local property taxes are another area of concern from Stoffers. Many city and county governments have suffered as tax revenue fell during the pandemic. Stoffers is concerned that they’ll recoup that revenue through higher taxes on real estate owners.

“The deficits that are being run by these municipalities have to be paid for somehow,” Stoffers says. “In some cases, these property taxes are going way up.”

Insurance premiums represent yet another concern. “I hear about insurance premiums in low lying areas going way up,” Stoffers says. “You probably can’t offset that with rental increases. That is having an impact as well. I think both of those things are going to get worse before they get better.”

Long term, Stoffers, like many in commercial real estate, have expressed concerns about trillion-dollar deficits.

“I think there is concern down the road about how we pay for all this spending,” Stoffers says. “What does that do to long-term rates in three or five years when some of these loans are maturing? So there is some concern, but that is outside of real estate.”

Still, those macro trends could hit CRE investors if loans that are 3% or 4% become 8% loans. “It is a little harder to underwrite them three to five years down the road,” Stoffers says.

Still, somewhat surprisingly, Stoffers doesn’t sense a lot of alarm from buyers about how their exit strategy will change if rates don’t rise.

“It’s a little bit surprising, but we do not see that concern raised,” he says. “I think about that, but we’re not seeing many borrowers thinking about that.”