Momentum amid uncertainty: CRE finance leaders discuss “what comes next”
After two turbulent pandemic years, leaders in the commercial real estate (CRE) industry are ready to look ahead. Economic growth accelerated in 2021, but it brought with it inflation and risk. Some CRE subsectors are faring better in a marketplace that is flooded with capital. And, the industry as a whole is reckoning with issues such as digital transformation, environmental, social and governance (ESG) mandates and the competitive hiring market.
These issues were the center of discussion at the 2022 Mortgage Bankers Association Commercial Real Estate Finance Conference held in February. Angela Mago, President, Key Commercial Bank and Real Estate Capital, joined Victor Calanog, Ph.D., CRE, FRICS, Head of Commercial Real Estate Economics, Moody's Analytics; Charles Ostroff, Senior Vice President and Multifamily Chief Credit Officer, Fannie Mae; and Jeffrey Erxleben, Executive Vice President, Northmarq, to discuss what they see ahead in CRE finance.
Is the wave of CRE deals cresting?
Multifamily deal totals reached record levels in 2021, and that momentum is not expected to slow. At the conference, MBA announced that multifamily lending is forecasted to rise to $493 billion in 2022 – a new record and a 5% increase that surpasses last year's record total of $470 billion. In addition, total commercial and multifamily lending is expected to surpass an astounding $1 trillion for the first time.1
Things are looking bright overall, according to Mago, despite some questions remaining about federal legislation, monetary policy and the regulatory environment. “We feel good about the economy and the real estate business in general, even the asset classes that have been under some stress,” said Mago. “We have great momentum going into 2022.” However, she noted that the rising interest rate environment in 2022 will slow some of the exuberance.
Mago also noted that the political impasse around the Build Back Better federal legislation is also causing some concern, especially since the version of the bill passed in the U.S. House of Representatives had some spending that would be favorable for the affordable housing market.
The current fiscal environment is an interesting time, remarked Mago, in which the end of quantitative easing, rising interest rates and tightening spreads are all converging. But, she also underscored the resilience of real estate and the pent-up demand from investors.
Other panelists agreed that, while rate spreads might be tightening somewhat, the flood of money in the market is keeping prices up and cap rates down. Even as interest rates rise, changes in pricing will lag because of the volume of cash that is available.
What trends will be ahead for CRE?
The group agreed that multifamily and industrial will continue to be the favored asset classes, thanks to their strong fundamentals throughout the pandemic and “terrific” demand drivers. However, only so many deals are available, and opportunistic investors are now looking into retail and office, where greater cap rate movement is expected.
The experts expect to see continued interest in secondary markets, especially those that saw a population influx during the pandemic. Specialty products, such as single-family rentals, are also gaining interest from big institutional investors.
Increasing affordable housing stock will continue to be a top priority for lenders and the federal agencies, with a gap of 7 million needed units. Mago pointed out that, with many corporations pledging to increase their efforts in ESG, investing in affordable housing plays well into those priorities.
How CRE lending is adapting to sociopolitical changes
The discussion turned to how CRE finance firms are addressing broader business issues. With the rapid growth in work volume, CRE lenders and managers are contending with the same staffing challenges that many businesses are facing. They’re facing increased competition for underwriters and analysts, and challenges hiring and retaining employees, and increasing the diversity of their workforces.
“We have not seen the ‘great resignation’ in real estate as other industries have seen, but I worry about growing the next generation of talent, succession strategies and focusing on diversity,” said Mago.
Technological change and the growing competition from financial technology (fintech) firms was also an issue. “We’re trying to lean into it. We’ve done a good job at partnering strategically with fintech, specifically where there’s a good cultural fit and where there’s a need to be solved,” said Mago. “It’s been most pronounced in commercial payments, because everyone is trying to create an experience that’s good for their customer.”
The panelists agreed that, while automation could benefit some aspects of CRE financing, the human touch is still necessary in this relationship-based business.
Looking farther ahead, CRE investment has a great reckoning ahead in how it will address environmental impacts in its underwriting decisions. Carbon neutrality, renewable energy and green building will be key considerations for real estate portfolios.
The future of CRE
At the start of 2022, Americans are dealing with the repercussions of two years of heightened stress and uncertainty. Despite a robust job market, the economy is now constrained by rising interest rates and food, housing and energy costs. This environment could put a damper on the high energy of CRE industry, but deal volume is expected to continue to surge.
KeyBank is one of the country’s leading multifamily originators.2 To find opportunities in an active deal environment, reach out to your mortgage banker or key.com/rec.
- MBA: “MBA Forecast: Commercial/Multifamily Lending to Hit Record $1 Trillion in 2022,” Feb. 14, 2022. https://www.mba.org/2022-press-releases/february/mba-forecast-commercial/multifamily-lending-to-hit-record-1-trillion-in-2022
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