Market Dislocation May Uncover Silver Lining For Commercial Real Estate Lending

The global economy, commercial real estate included, has forced some lenders and investors to sit on the sidelines. Changing interest rates, inflation and recent shifts have resulted in investors losing deals and having to push the pause button. The volatility has slowed down activity and market rates have moved quickly.

Some experts believe interest rates for debt could rise 200 to 300 basis points, which would not favor borrowers. Not only will that make it challenging to underwrite deals, but many will no longer even pencil, especially those expecting to find a low cost of capital.

he global economy, commercial real estate included, has forced some lenders and investors to sit on the sidelines. Changing interest rates, inflation and recent shifts have resulted in investors losing deals and having to push the pause button. The volatility has slowed down activity and market rates have moved quickly.

Some experts believe interest rates for debt could rise 200 to 300 basis points, which would not favor borrowers. Not only will that make it challenging to underwrite deals, but many will no longer even pencil, especially those expecting to find a low cost of capital.

The historically low interest rates over the past 10 years have created an environment where the norm was cheap money. That is swiftly changing, and borrowers must adjust. Debt is getting more expensive, though I have seen that equity is cheaper in many instances as investors accept lower yields. Overall, the reality is lenders are not underwriting like they used to.

We are seeing a flight to fixed rates as borrowers attempt to reduce their exposure to rising rates and skyrocketing interest rate caps costs. In times when interest rates were flat or lower, the cost of interest rate caps was cheap. But costs have soared in the past year. Additionally, some shorter-term investors are shifting strategies (paywall) to a longer-term hold since they cannot find strong deals to replace existing assets.

The rise of interest rates is putting downward pressure on loan dollars and overall loan-to-value ratio which has reduced lending activity. Some seller servicers and DUS lenders are pushing the agencies to reduce their debt service coverage requirements to mitigate the loss of loan dollars, but it is not likely that Fannie Mae or Freddie Mac will change any requirements. There is some room in the spreads to be reduced since they have been lower in past.


There are changes and adjustments underway in the marketplace. For now, it doesn’t look like any agency relief is forthcoming, and that is expected to continue holding back deal flow. In the second half of 2022, I predict that activity could accelerate as the agencies look at their allocations and realize they need to push more capital into the marketplace to meet their annual goals. But the reduction of spreads remains uncertain and bridge loan spreads are increasing.

Real market dislocation may be ahead and that could result in a 10% or 15% drop in asking prices. Opportunities may surface for deals that are falling out now to get sucked up by those waiting in wings. We may see institutional capital move into the middle market space and pursue smaller deals or explore secondary markets that they might not have looked into before.

Higher rates might allow these institutions to absorb lower leverage since they are flush with cash. The market was previously driven by 1031 exchange opportunities, but investors will need more to put down and pay more to win deals. We continue to see those buyers active because many are selling or have sold, so they need to move into a new investment before the tax advantages they gained evaporate. It will be interesting to see how investors like institutional groups handle lower leverage.

On the lending side, especially in the bridge debt space, debt yield requirements are being raised and that will affect loan amounts in the lower levels. Investors may not buy assets at a low cap rate, electing to chase yield in other sectors such as limited-service hotels.

Market disruption brings opportunities for those who are savvy and patient. First, some of the competition will be reduced. I believe the market has been too frothy, so taking a breather may be the pause needed to return to sound fundamentals.

Second, a slowdown will allow those on the sidelines or new entrants previously boxed out to come in. The market ahead may be one in which lower returns become popular. Lenders may focus on de-risking strategies and pull back from certain markets where they have more portfolio exposure, helping to ensure diversification. Smart money could decrease leverage 5% from the current loan-to-cost ratio (paywall), currently in the 70% to 75% range, and could help reduce the leverage offered in the bridge lending space.

Completing construction deals is a bit more troubling today because rent increases are not keeping pace with construction costs. That’s causing projects to enter a zone where they no longer are viable. Traditionally, construction lenders have focused on the projected yield on cost (the projected net operating income divided by the total project cost) to determine viability. For multifamily, this figure sits around 6% (the lowest it has likely ever been).

Lenders want to see a spread between the yield on cost and the property’s market cap rate to ensure profitability. For example, if a multifamily property sells at a 4.5% cap rate and the yield on cost to build to finished product is also 4.5%, there’s no profit incentive to move forward.

We are seeing deals with low yield on cost emerge due to construction cost increases. The developer then must find other ways to make a project pencil, though trying to do so via higher rents could be problematic. Construction budgets from just a few months ago are, in many cases, significantly higher.

Still, many lenders and investors are sitting on large amounts of cash as we enter this uncertain market. Sellers who have divested assets, or investors who have de-risked portfolios, are now in a position to weather what may come and could capitalize on opportunities that arise. Even if they elected to stay put, I predict they will be just fine since they hold real assets that provide hedges against inflation and have proven to be a sound place to invest in and place money in.

There have been moments when we’ve needed to tread with more caution. This is probably one of those times.

Savills Expands Junior Broker Development Program to Three Additional Markets in the US

NEW YORK, Oct. 28, 2021 /PRNewswire/ — Savills announced that it expanded its Junior Broker Development Program (JBDP) to three additional markets in the US, doubling down on its commitment to recruit, train, and invest in the next generation of Savills associate brokers. Also, for the first time, the global real estate advisory firm opened the program to existing, non-brokerage employees in North America interested in sales, consulting, or complementary roles.

During its inaugural 2020 class, Savills selected eight young professionals in New York City and two in Washington, DC, to participate in the 15-month salaried rotational program, which provided recent college graduates the opportunity to advance their commercial real estate careers. Of the 10 participants, 90% were women or from racially diverse backgrounds. Today, 100% of the candidates who completed the program are now working in full-time positions for the company.

“Having colleagues with different perspectives and lived experiences at the decision-making table is crucial to the vitality of our firm and the future of our industry,” said Mitchell E. Rudin, chairman and CEO, Savills North America. “By expanding the Junior Broker Development Program, we are working to create substantive changes that will open up opportunities for young women and minority groups to enter the industry with equal and equitable chances for success.”

This year’s JBDP class has 11 participants across Chicago, Houston, Los Angeles, New York, and Washington. Each will have the opportunity to rotate across several of the firm’s service lines, including brokerage, research, cross-border tenant advisory, industrial services, capital markets, portfolio solutions, consulting, workplace strategy, business development, and client technology solutions. Click to read more at

The Richest Real Estate Billionaires On The 2021 Forbes 400 List

Donald Trump may have fallen off The Forbes 400 list of richest Americans this year, but his fellow real estate tycoons have boosted their wealth—both in hot markets (Palm Beach) and those still recovering (New York).

The group of real estate tycoons on this year’s Forbes 400 list of richest Americans is as notable for those who didn’t make the cut as for those who did: Donald Trump, with an estimated net worth of $2.5 billion, fell short of the $2.9 billion cut off to make it into the 400 richest Americans. The former president isn’t the only one to have fallen from the ranks in 2021. Five fellow New York real estate billionaires as well as Silicon Valley developers Richard Peery and John Arrillaga also dropped off The Forbes 400 list. Collectively, the 24 real estate tycoons on this year’s list are worth $122 billion, nearly $4 billion less than the 32 in real estate were worth in 2020.

Despite the ongoing Covid-19 pandemic and the delay in workers returning to offices in many cities across the country, America’s real estate barons have gotten wealthier as their prized assets and diversified portfolios recovered from 2020 lows. Outside of Washington, D.C.—where the sole real estate billionaire residing in the capital, Washington Nationals owner Ted Lerner, is $100 million poorer this year—real estate magnates based in cities ranging from New York and Chicago to Los Angeles and Palm Beach have seen their fortunes grow since the 2020 Forbes 400 list.

At the top, Orange County, California-based Donald Bren remains the wealthiest real estate billionaire in the country with an estimated $16.2 billion net worth, nearly $1 billion higher than last year. The biggest gainer is Chicago-based gambling and real estate mogul Neil Bluhm, whose net worth grew by $2.4 billion to $6.4 billion—but that was largely thanks to his shares in publicly traded online gaming outfit Rush Street Interactive. (His luxury retail real assets in Chicago have also done well despite the pandemic.) Click to read more at

Here’s Why The Leverage That We Can’t Track Matters

Despite all we hear about asset classes increasing in value across the board and the unprecedented strength of the U.S. economy, as a real estate entrepreneur and former professional trader, here’s what keeps me up at night: I believe we only know part of the story and that the piece we’re missing — our current inability to account for “invisible” or “hidden” leverage can have significant implications for our country’s economic health.

The hitch? We likely won’t know until it’s too late.

In a nutshell, “leverage” is the term for funds that are borrowed (outright or against an asset) with a goal of using those funds for further financial gain. Applied wisely, leverage has fueled wealth and economic growth for centuries; however, as with any debt, when things go south, borrowers can find themselves underwater, financially speaking. This is simply the reality of our economic system.

The risk is amplified when investors leverage assets that are inherently more difficult to track — such as cryptocurrencies, fine art, collectible cars and wine collections — and that are likely used far more often than our economic data shows. Trickier still, this kind of borrowing masks the multiplier effects of risk and debt, and it tends to be prevalent during times like these when we’re feeling optimistic and asset valuations “seem” to be on a never-ending upward trajectory. Click to read more at

Real Estate Investors Lay Down in Family Homes

Wall Street businesses are more enthusiastic about buying family homes than ever before. They run the risk of killing their latest Golden Goose if they surge existing supplies rather than helping them build new homes.

Last week, Blackstone Real Estate Investment Trust purchased a portfolio of apartments from insurer American International Group for $ 5.1 billion. In June, the investment company spent $ 6 billion on the Home Partners of America, which owns more than 17,000 homes nationwide and offers lessors purchasing options. Bloomberg reported that private equity giant KKR has launched a new division to buy and rent homes.

Meanwhile, in Europe, real estate investors are increasing their share of the portfolio of investing in residential real estate, and German landlord Vonovia recently launched a € 18 billion acquisition of competitor Deutsche Wohnen. That’s $ 21.2 billion. Click to read more at

REDnews 2021 Houston Commercial Real Estate Forecast Summit

Office Market Update Moderator: Gil Staley-The Woodlands Area Economic
Development Speakers: Robert Cromwell-Moody Rambin; Stephanie Burritt-Gensler; Ryan Barbles-Stream Realty Partners

Takeaway: The pandemic layered more pain on the office market in Houston, following as it did the slump in oil prices and the resulting employee layoffs. The flight to the suburbs from the CBD and indecision regarding co-working space has further muddled the picture and has added to landlord anxiety.

• Houston leads the country in office vacancy rate; hopefully, this year will see a bottoming out and a slow return to absorption
• There is a flight to newness, as most Houston office product was built in the ‘80s to serve that boom in oil
• The CBD and Energy Corridor have suffered the highest vacancy rates, with Uptown Houston also feeling pressure; employees working from home are enjoying freedom from long commutes; elevator and park and drive anxiety has driven the work from home phenomenon mini-boutique spaces in the suburbs as well
• There is a new term spawned by remote working: FOMO, or “fear of missing out” on what is happening within the company; collaboration is a big part of forming resilient company cultures and it is much weaker when working via Zoom
• Landlords are considering increasing ventilation even as Covid fades, but there is only so much humid air one can bring in from the outside in Houston
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