A Signature Year: Debt Markets And Consequences For New York City CRE In 2024 – Forbes

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Lately an old adage from the commercial real estate recession of the early 1990s “Stay alive until ’95” has been recycled as “Stay alive until ’25,” which in today’s market translates to owners hanging onto properties until interest rates fall, regulations change, collections improve, more workers return to the office or another desirable market shift.

Some asset classes are in a better position to survive than others, however. In New York City, rent stabilized multifamily properties strangled by regulations and Class B and C office buildings saddled with seismic shifts in the work culture are experiencing the greatest challenges, especially if they are facing mortgage maturities.

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High Rates Stall Transaction Volume in 2023

The Federal Reserve’s restrictive monetary policy has been central to the pain experienced by the commercial real estate market this year. The Fed rapidly increased the federal funds rate by 525 basis points from March 2022 to July 2023 and short-term rates followed in tandem.

Nationally, commercial and multifamily mortgage loan originations dropped year-over-year through the third quarter of 2023 by 51% for multifamily properties; 64% for office buildings; 42% for retail assets; 57% for industrial sites; and 33% for hotels, according to the Mortgage Bankers Association Quarterly Survey for Q3 2023.

The survey shows that lenders across the board retrenched. Origination volume fell by 67% for depository lenders; by 47% for life insurance companies; by 18% for Fannie Mae and Freddie Mac; by 60% for investor-driven lenders, and by 40% for CMBS/Conduits, according to the MBA Origination Volume Index for the first three quarters of 2023 compared to the first three quarters of 2022.

The consequences of the higher rate environment have touched every asset class and contributed to investment sales in New York City falling by nearly 50% year over year in the first three quarters of the year to $16.4 billion, Ariel’s research shows.

The Signature Effect

Effect#1: Less liquidity

The fallout from rate hikes and subsequent runs on deposits resulted in regulators closing several banks in the first half of 2023. One of New York City’s top multifamily lenders, Signature Bank, was closed by regulators in March and its exit has left a void.

Smaller banks and agency lenders have stepped up but are making fewer loans in the higher interest rate environment. Our Capital Services team also is seeing the emergence of non-bank unregulated lenders that offer fixed rate, permanent, non- recourse lending without depository requirements. And, with the cost of debt exceeding “market” cap rates for core deals, some buyers are opting for all equity capital stacks to avoid negative leverage and then are planning to refinance down the road.

Effect #2: Note selling and restructuring

In September, the FDIC began marketing the Signature loans in a competitive sealed-bid sale consisting of 14 pools of 5,137 commercial real estate loans having an unpaid principal balance of approximately $33.22 billion. Of the total loans, approximately $15 billion are collateralized by rent stabilized or rent controlled properties.

The FDIC awarded Blackstone Inc. affiliates a 20% equity interest in the $16.8 billion pool of Signature loans collateralized by office, retail and market–rate multifamily properties, and the agency will retain an 80% equity interest. The Blackstone group bid $1.2 billion for the stake in the portfolio and will be responsible for the management, servicing and liquidation of the assets.

Related Fund Management and two nonprofits, the Community Preservation Corp. and Neighborhood Restore, are reportedly the favored contenders for the rent–stabilized or rent–controlled multifamily loan portfolio, which also attracted bids from others such as Tredway, Brookfield, Brooksville, Sabal and Skylight Real Estate.

We expect loan sale activity and restructuring to increase over the coming year, leading to further pricing discovery and prompting other market players and lenders to take action.

Minding The Gap: Private Lending

An examination of Federal Reserve data shows that commercial real estate loans on the books of the largest domestically chartered commercial banks with total consolidated assets of at least $100 billion, have declined since May, falling by nearly $15 billion to $878.5 billion in November.

As noted above, CMBS originations dropped 40% year-over-year, according to the Mortgage Bankers Association’s (MBA) Quarterly Survey. Overall, the CMBS delinquency rate rose 159 basis points year-over-year to 4.58% in November, but lower than the all-time high of 10.34% in July 2012 and COVID-19 high of 10.32% in June 2020, Trepp reported. The delinquency rate for office properties jumped the most, 438 bps year-over-year to 6.08% in November, Trepp’s analysis of delinquency rates 30 days+ shows.

Private credit fund managers, whose lending rose 60% year-over-year in 2022 versus 2021 to an estimated $333 billion, are among the entities taking up the slack on the larger deals, according research from the Alternative Credit Council (ACC), the private credit affiliate of the Alternative Investment Management Association (AIMA).

These funds “are capitalizing on opportunities created by slowdowns in the syndicated and high yield credit markets, and the expansion of asset-backed finance, real estate debt and non-sponsored lending strategies. The research finds that this growth is led by larger private credit fund managers who accounted for an estimated 58% of capital deployed,” according to the ACC report.

Blackstone is in this universe of private lenders. At the end of November, Blackstone announced the final close on $2.6 billion for its latest real estate secondaries fund, Strategic Partners Real Estate VIII L.P., which will specialize in stakes in other private, generally less liquid real estate investment funds. Blackstone has one of the market’s largest real estate portfolios, spanning interests in over 540 underlying real estate funds managed by over 220 GPs.

Blackstone and KKR & Co. recently closed a $450 million private debt financing for Highgate, a New York-based hospitality and hotel management company, Bloomberg reported.

The Real Deal also announced the following significant recent loans made by other alternative lenders:

  • Global Atlantic Financial Group provided $263 million to refinance a 498-unit multifamily building at 101 West End Avenue in Lincoln Center on behalf of Dermot Company, Affinius Capital and PGGM.
  • Goldman Sachs provided a $233 million in construction financing to Carmel Partners for a 569-unit multifamily building in Brooklyn.
  • Banco Inbursa of Mexico provided $220 million in August to Silverstein Properties and MetroLoft Management to buy and convert a 410,000-square-foot office building at 55 Broad Street into 571 market-rate apartments. Ares Real Estate is an equity partner.
  • Apollo Global Management provided Davidson Kempner Capital Management $150 million to refinance the 774-key Westin Grand Central Hotel.

In addition, the Commercial Observer reported that G4 Capital Partners provided a $235 million construction loan in November for Chetrit Group’s 21-story, 54-unit luxury condo development on the site of the former St. John the Martyr church on the Upper East Side.

What’s in Store for ‘24?

We saw turbulence in the debt markets during the last year but some winners have emerged. Stable cash flowing residential assets such as predominantly free market buildings, affordable housing buildings with predictable cash flow, prime office assets with high occupancy, long-term tenancy and predictable cash flow and stable retail properties still have plenty of liquidity from balance sheet lenders and agency lenders (for multifamily and affordable).

Inflation is trending downward and the recent economic reports have been positive. If these conditions continue, Fed policymakers project that they will make multiple rate cuts next year from a median fed funds rate of 5.4% at the end of this year to 4.6% at the end of 2024; 3.6% at the end of 2025; and 2.9% at the end of 2026. Short-term Treasury rates have already fallen from their peak in October, providing some relief to borrowers. Also, private funds are prepared to step up and provide capital for the larger loans.

No doubt, borrowers with underwater assets facing mortgage maturities will be confronted with tough decisions next year. Lawmakers could assist these struggling owners by passing legislation that would provide incentives to renovate vacant rent regulated apartments and convert obsolete office buildings to residential use.

Ultimately, the New York City real estate market is resilient and there will always be buyers for every asset class. What may change, however, is a shift in ownership from smaller operators to buyers backed by larger funds.

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