Real Estate

Finance & Economy

The State of CRE: Aaron Appel, Ivy Zelman, & Kris Mikkelsen

February 14, 2024

The State of CRE: Aaron Appel, Ivy Zelman, & Kris Mikkelsen

Ivy Zleman, Kris Mikkelsen, & Aaron Appel

Walker & Dunlop experts Ivy Zelman, Kris Mikkelsen, and Aaron Appel joins Will Walker to discuss market updates, the trends in property sales and financing that they’re seeing, and their outlook for 2024 and beyond.

In a recent special episode of the Walker Webcast, I sat down with three esteemed members of the Walker & Dunlop team for a wide-ranging discussion about what is happening right now in CRE. I was joined by Aaron Appel, Senior Managing Director of Capital Markets,  Ivy Zelman, the co-founder and Executive Vice President of Research and Securities, and Kris Mikkelsen, the Executive Vice President of Investment Sales.  

As always, their insights into the current climate and forward-looking projections were well worth considering. 

Is inflation beginning to spike again?

Even though we’ve seen many deflationary pressures on the economy over the course of the past year, the most recent CPI print came in quite a bit hotter than expected. Many believe this can be attributed to the fact that CPI uses lagging indicators, so the data being put out today isn’t actually representative of what we’re seeing today.

For instance, according to recent CPI data, there was a spike in rent costs.  However, what we see is much different than what the BLS sees. Ivy brought up the fact that rent growth is decelerating fairly rapidly, indicating that we’re actually seeing a bit of disinflation in rents.  However, since CPI is based on lagging indicators, this data likely won’t be accounted for in the numbers for another few months.

Is there enough liquidity for refinancing?

A looming wave of debt maturities will be hitting us very soon, with $930 billion in debt maturing in 2024, meaning there will be considerable amounts of refinancing activity hitting the market soon.  However, given the large amount of debt coming to term this year and the fact that Government Sponsored Entities finance a very small portion of that, some are concerned that there isn’t enough liquidity in the market to refinance all of this debt.

We believe this is true to an extent.  While there certainly is a lot of capital in the marketplace, those with the capital have become a bit more selective with the types of properties that they will finance. Many are still very skeptical about the commercial office space, so they are reluctant to lend on it. When you couple this with the fact that a significant portion of the debt coming to term in 2024 is on commercial office space, you have a bit of a perfect storm scenario in the office space.

Multifamily supply and demand in the Sun Belt

The current state of supply and demand of multifamily can be summed up in one sentence.  Although demand for multifamily has been strong, supply has been stronger. The backlog of multifamily that we’re currently seeing is the highest we’ve seen in quite some time, with nearly a million units. The Sun Belt represents a large portion of where these units are being delivered. However, the majority of these units are being leased. This is in part because owners are putting more of an emphasis on occupancy than on lease rate. As long as the job market continues to stay resilient, we’ll likely see occupancy continue to stay in the 95-96 percent range in the Sun Belt.

Projected growth in construction

While we are still financing construction deals, they are fewer and further between than just a couple of years ago, given the drastic increase in rates.  We’ve also seen several deals where builders must find financing at any cost.  After all, if you’re midway through a new construction project and your financing has come to term, you can abandon the project and get nothing or try to finance at practically any cost and adjust your plans accordingly.  This has led to us seeing some deals with astronomical spreads. For instance, we just completed financing on an active senior living facility with an 8 percent first and a 14.5 percent mezzanine, which really outlines how some developers, irrespective of the cost of capital, need to complete their projects.

The haves and have-nots for multifamily in 2024

While multifamily demand has stayed relatively strong, considering the rates that we’ve seen for the past year and a half, the risk is being repriced across the board. Right now, we’re seeing much more demand for A+ locations with unique products in areas that have great employment and population trends. As a result, buyers are willing to accept negative leverage for as many as two years and cap rates in the high 4 to low 5 percent range.

On the other end of the spectrum, demand is much lower for secondary and tertiary markets that offer a commodity product and may see an excess of supply in the short term. Since there is much less competition for these deals, we’re seeing more yield-oriented buyers, with cap rates driven by leverage.

Projections for the end of 2024

To wrap things up, I asked my team where they see the 10-year treasury by the end of the year.  Ivy actually believes we won’t see much movement in terms of the 10-year because she thinks all of the short-term movements in rates are more/less already priced in. If we were to see the 10-year come down in a meaningful way, she thinks it’s not going to be for a good reason. She added that if she were to be making investments in a particular real estate sector, she would choose land, as the large publicly traded builders do not want to own the land they’re developing at this time.

Both Chris and Aaron agreed with Ivy on the fact that the 10-year rate is likely to remain flat through the end of the year. However, we’re much more likely to see movement on the 5-year treasury.

I consider myself fortunate to have such insightful people on our Walker & Dunlop team. As I am sure our regular viewers would agree, Ivy, Kris, and Aaron always add real expertise to our webcast. Look for more valuable insights like these coming up soon.

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