Commercial Real Estate: Navigating The Market Squeeze To Success

As interest rates rise, the real estate sector faces unprecedented challenges.
Discover the unique investment opportunities in the evolving commercial real estate market.

The $1.4 Trillion CRE Financing Dilemma

The Commercial Real Estate (CRE) sector is undergoing significant changes. The Federal Reserve has raised interest rates at the fastest pace since 1981, making borrowing more costly.

Many developers who borrowed money earlier at cheaper rates are now struggling to repay.
By 2025, there's a massive $1.4 trillion debt due. 

Small banks, one of the primary source of CRE & multi-family real estate financing are now grappling with decreasing deposits. During periods of low interest rates, banks increasingly depended on inexpensive retail deposits to fund loans, as customers had limited motivation to transfer their money elsewhere.

Banking Liquidity & Refinancing

Community and Regional banks are currently holding $1.9 trillion of CRE loans—twice as much as large banks.

However, as borrowers look to refinance, we believe these banks face challenges, due to a reduced deposit base compared to previous years and declining underlying real estate asset values.

Banks prefer to maintain liquid assets, not manage tenants or tie up capital. This situation results in a capital imbalance. Consequently, smaller banks are inclined to sell these assets quickly, often at conservative values, to prevent losses and capital tie up.

This paves the way for astute buyers to secure valuable CRE deals from these motivated ‘non-economic’ sellers.
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Smart Managers Unloading CRE

Astute real estate asset managers, such as Brookfield, are strategically divesting underperforming office properties in response to low return-to-office rates and escalating debt servicing expenses.

This strategic move enables them to reallocate capital towards more promising opportunities. Notably, these loans are structured as "non-recourse," safeguarding the asset manager's creditworthiness even in the event of loan default.

Conversely, multifamily apartment owners are currently maintaining a steadfast stance, insisting on unrealistic pricing expectations. According to MSCI, the bid-ask spread between buyers and sellers has widened to 11%, marking the highest level since 2012. We anticipate that as these loans mature, sellers will inevitably face pressure to align their pricing with market realities, necessitating divestment.
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Capital Imbalance & Distress

Wall Street is getting ready to scoop up the CRE deals on the cheap (source:WSJ). The U.S. commercial property prices have already fallen 16% since their peaks in March 2022.

We believe that as the interest rates continue being "higher for longer" and and as CRE loans reach their maturity dates, we will witness a notable increase in distressed properties and foreclosures, a trend that is already emerging.
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The Window of Opportunity

The number of properties that slip into distress will be key for bargain-hunters. Although the current landscape differs from the 2008 crisis, it still offers favorable risk-adjusted returns.

Our perspective is that the most promising opportunities lie outside over-saturated commercial centers like New York City and San Francisco, which are dominated by large private equity firms such as Blackstone & KKR.

We advocate concentrating on deals ranging from $10 million to $25 million in secondary markets like Jacksonville and Dallas. Realizing this potential requires thorough on-ground research, expert sourcing and banking relationships, and rigorous due diligence on both managers and funds.

The Lumida Advantage

Trusted Fiduciary

Lumida operates as a fiduciary, prioritizing our clients' interests above our own. We are not commission-based brokers; instead, we focus on understanding each client's unique situation to craft tailored investment strategies that align with their objectives.

Broadened Participation

Access to distressed commercial real estate opportunities is often limited to the ultra-wealthy or those committing over $500,000. Through our special purpose vehicle, we allow qualified clients to invest at lower ticket sizes, making opportunities that were once exclusive to the ultra-wealthy accessible to a broader investor base.

Manager Selection

Lumida excels in identifying investment themes and sourcing adept managers to leverage them. Our rigorous diligence process ensures managers have deep expertise, a proven success record, and a commitment to excellence. Qualified investors are welcome to access Lumida's comprehensive diligence reports.
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