Which Asset Classes Are Deal Ready?

Natalie Dolce

SAN DIEGO—The outlook for multifamily and retail seems to be stable for now, but the outlook for office remains uncertain. So said a panel of experts during a breakout session at the recent Mortgage Bankers Association CREF 2023 conference and expo here in San Diego. Moderated by Victor Calanog, head of Commercial Real Estate Economics at Moody’s Analytics CRE, panelists discussed how to generate business in today’s current climate with rising rates and decreasing sales activity along with reduced demand across all asset classes. 

The consensus among the industry experts was that the capital market outlook for retail and multifamily is good. Panelist Claudia Steeb, Senior Managing Director at JLL Capital Markets, said that retail is improving and is no longer at the bottom of the totem pole. “Office has replaced us,” she said. “The pandemic, if it did one thing, cleared out the bad retail.”

What has survived, she continued, has done well. “People are starting to look at retail again because their portfolios are full on the multifamily side and they are diversifying. It is still very conservative underwriting. We are in a little bit of a turn-around where people are talking about retail again.”

Hilary Branson Provinse, Executive Vice President & Head of Mortgage Banking at Berkadia, talked about how multifamily, too, is faring well. “Fundamentals are good and performance is strong. We are expecting rent growth to stabilize.”

According to Provinse, we are back to where multifamily has been for decades. “The hiccups are going to come at a submarket level,” she said. “We need the supply long term so no one is questioning the long term ability to absorb it. There are pockets of geography that will see stress.”

All panelists agree that the outlook for office is uncertain. Panelist Quentin Fogan, Managing Director, CMBS Origination, Bank of America, said that office is the most challenged asset on this side of Covid. “Fundamentally it is a long trajectory to get through the challenges that office faces.  In terms of its impact internationally, it is a complex problem and there is no easy solution.”

From a liquidity standpoint, Fogan said that many of the historical capital sources for office are not prevalent right now. “In major metros, utilization of office is around 46%. We still have various elements about return to office and what that means etc. None of those things have really firmed up so from a financing standpoint, it is nuanced.” 

David A. Harrison, Chief Operating Officer, PNC Real Estate, talked a bit about job creation and noted that a lot of the econometric models that are forecasting on jobs are talking about traditional models. “The rebound in the service sector may be enough to pull us out of a nosedive recession or a true hard landing,” he said. “That drives the overall economy and paints the feeling around a recession. Back to what is going on, servicing as a whole is bifurcated. Structures and loan provisions get more complicated more so in new portfolios that come in. The flow of new loans is down dramatically.”

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