LightBox recently hosted a LinkedIn Live event on with industry experts to discuss our first-quarter report, Early 2023 Barometers: Resetting Market Expectations. Moderated by Michael Griffin, Managing Director of Broker Solutions at LightBox, the panel included Andrew Phillips, Head of Sales and Strategic Partnerships for Broker Solutions at LightBox; Christine Espenshade, Vice Chairman of Newmark’s Multifamily Capital Markets group for the Mid-Atlantic region; and Arthur Milston, a Senior Managing Director and Co-Head of the Capital Markets group at NAI Global. After the commercial real estate market slowed down dramatically in recent months, the early 2023 expectations of a market bounce-back in the second half have already given way to a less sanguine forecast.
Here’s what our panel had to say about the shift in market conditions, what LightBox data reveals about market trends and where the strongest investment opportunities lie:
- LightBox is seeing early signs of stabilizing declines in transaction volume and a rise in loan sales.
The volume of property listings brought to market using the LightBox Real Capital Markets platform is a leading indicator of transaction trends. We saw a 50% dip in the fourth quarter versus the prior year in 4Q22, followed by a 30% drop in January. February was down 20% against January and March held steady, which could be an early sign of stabilization.
Post-financial crisis, from about 2009 to 2014, an average 350 loans per year were brought to market using the RCM platform by our U.S. broker customers. During the past five years, that average fell to about 50 loans, a huge drop. This past quarter alone, 60 loan sales have been brought to the market. Andrew Phillips commented on this observation “To me, that is a leading indicator that banks are looking to offload loans and loan portfolios. I expect we’ll see a number of banks under pressure to dispose of some of their commercial real estate loan in order to free up capital and exit potentially distressed asset situations.”
- The market has a long way to go in dealing with office leases and loan maturities.
Arthur Milton of NAI Global compared the market to a baseball game “In terms of the reinvention of office, we’re in the top of the first inning compared to the middle innings for retail. We’re dealing with the post-pandemic issues of work from home and companies doing more with less space.”
He went on to comment “From a financing standpoint, those who inked long term leases pre-pandemic are still three to five years out from rolling through their leases for office space, so there will be distress emerging. Eight of the top 25 office markets will see at least 20% of their office product go thru a refi. Cities like Atlanta, Portland, Denver, Chicago, LA, DC, Austin and Dallas all have more than 20% of their office loans maturing so I’d be extremely selective and cautious in these markets.”
- Important factors are working in favor of multifamily.
Multifamily is the one asset class where debt is available, and it’s more easily priced due to Fannie Mae and Freddie Mac. Newmark’s Christine Espenshade weighed in firsthand “The number of applications that have been put into Fannie and Freddie in the past two weeks alone equal the amount for all of January, February and the first half of March.”
Arthur Milston jumped in “From an institutional standpoint, the underlying fundamentals in multifamily remain incredibly compelling over the long-term, and we’re going through a repricing exercise. Debt is readily available just with different prices and different terms. It’s definitely one of the best places in commercial real estate right now.”
- The best opportunities are in niche-oriented investments, and grocery/open-air retail.
Arthur Milston flexed his expertise across different property types commenting here “From a long-term growth fundamentals and prospects standpoint, the best opportunities are in niche-oriented investments such as self-storage, data centers, manufactured homes, cold storage, life science and assets like that. These are not easy investments for people to jump into—they require an operating platform; knowledge of the space and they typically have less transaction volume.”
He also identified another opportunity to watch “Another strong sector is grocery and open-air retail. Retail fundamentals have gotten much better during the last few years and the marriage between brick and mortar and e-commerce grows stronger. You see a lot of retailers coming back and opening up stores to facilitate omnichannel strategies.”
- Cities are on the rebound for population growth and multifamily investment.
Post-pandemic multifamily communities reflect a recovery for cities like New York, San Francisco and Washington DC according to Christine Espenshade “All the metrics show that Sun Belt multifamily rent growth is moderating and that the mega cities are picking back up. We’ve seen massive rent growth and population migration back into Gateway cities. NYC rents are through the roof and DC has recovered nicely. I would look back into urban core for quality investment opportunities and better long-term returns.“
Market conditions are a mixed bag as the second quarter gets underway. Interest rate hikes are moderating, but there are growing concerns of more bank failures ahead. Some buyers are tapping the brakes, awaiting more clarity on a property pricing reset and the market is bracing for distress in certain asset classes and metros. There is no shortage of metrics to watch as the next few quarters unfold.
For more on distress, investment trends and the prospects for refinancing the nearly one trillion dollars of debt set to mature over the next three years, listen to the full replay of our event.
Read the full LightBox report here.
Watch LinkedIn Live recording here.