How CRE Leaders Are Securing Wins In Turbulent Times

Despite market headwinds, savvy commercial real estate professionals are finding ways to make deals work and prepare for a brighter future.

It has been a challenging few years for commercial real estate investors and developers. High interest rates, soaring office vacancies, and a fluctuating market have taken their toll on the industry. Yet, amid the turbulence of 2023, a cautious optimism is emerging among some of the sector's most influential leaders.

In March, Delaine Companies founder and CEO Jerrod Delaine expressed confidence that real estate investors would no longer see their values significantly impacted by interest rates. In July, Blackstone President Jonathan Gray told analysts, "The tenor of the conversations around real estate have improved."

However, challenges remain. Commercial property values are down 7% in the past 12 months, led by a 14% decline in office values. While activity seems to be slowly improving in the office sector, JLL estimates that 60% of active office leases were signed before the pandemic and are particularly susceptible to downsizing. CRE lenders have responded to higher costs of capital by reducing the debt they offer to borrowers, with CMBS providers reducing loan-to-value ratios by 14% to 55.7% between 2015 and 2023.

The bottom line is that the CRE investment market remains complex and competitive, and for many, wins can feel few and far between. With that in mind, several leaders in the CRE lending and development world shared how they are making deals pencil in this environment, what asset classes they are interested in, and how they are preparing their portfolios for success.

Capturing Value in the Middle Market

Justin Guichard, Managing Director and Co-Portfolio Manager at Oaktree Capital, said his company's real estate debt strategy aims to achieve attractive risk-adjusted returns through investments in private real estate-related debt and traded securities, primarily in the U.S. His team is particularly looking at the middle market, where there is less competition for capital due to the pullback by regional and community banks.

"We believe we have the opportunity to capture significant value in CRE assets, as prices have declined from their most recent peak by 21%, or approximately two-thirds of the declines CRE suffered in the Global Financial Crisis," Guichard said. "The opportunity set remains compelling as the ongoing dearth of liquidity, specifically in the regional and community banking system, continues to create an attractive environment for private real estate debt."

Opportunities in the New York Metro Area

Teodora Zobel, Chief Investment Officer at Midwood Investment & Development, sees an increasingly attractive set of opportunities in the New York metro area. "We feel that the region is poised for continued growth and investment in both the short and long term," Zobel said. "Lender or LP-driven sales of high-quality assets, coupled with continued uncertainty, are helping to narrow the bid-ask spread. There are finally some interesting opportunities in the market."

Investor Interest in High-Quality Assets

Lisa Knee, Managing Partner of Real Estate at EisnerAmper, observed that while underwriting standards have tightened, lenders are looking to allocate capital to borrowers with Class-A assets and high-quality tenants. "While financing for new construction has been challenging, we have witnessed this in the industrial market," Knee said. "We have seen an allocation of capital to existing distribution centers, warehouses, and other logistics centers having long-term tenants in place."

She added that hospitality assets have bounced back nicely from the pandemic, with the destination and luxury segments performing the best. With the rise of artificial intelligence, there is now huge demand for data centers. Investors also continue to chase Class-A retail properties in good markets, and grocery-anchored retail has remained strong.

A Looming Sell-Off in NYC

Bob Knakal, Chairman and CEO of BK Real Estate Advisors, predicted that within the next six to nine months, we will start to see the biggest sell-off in the history of New York City. "Class-B and C office products will lead the way," Knakal said. "Values have dropped so sharply that there will simply not be a way out for folks with too much debt. Other assets will have to be sold to raise the capital necessary to effectuate cash-in refinancings."

He believes newly built Class-A office will continue to do relatively well, but Class-B and C are going to go through a massive change in ownership. "Due to financing difficulties, many owners are selling assets to raise capital to effectuate cash-in refinancings," he said. "Reducing portfolio sizes and using capital from sales to bolster the balance of their portfolios is a strategy many owners are considering."

Finding Success Amid Challenges

Ryan Boan, Head of U.S. Retail and Mixed-Use Transactions at Nuveen, acknowledged that wins don't come as often as they used to, but his firm is finding them despite broader macroeconomic challenges. "We recently closed on a life insurance company loan at attractive terms on a grocery-anchored property we acquired earlier this year in the Atlanta area," he said. "On the other end of the spectrum, we've also had recent success refinancing several of our regional mall properties."

Embracing Market Dislocation

Jared Toothman, Executive Vice President at Lincoln Property Co., highlighted that his team closed three acquisitions this summer, including two multifamily development sites in New Jersey totaling 970 entitled units and a transitional medical office building in Manhattan. "These transactions derived from building a relationship with the existing owners to create a fair, mutually beneficial structure," he said. "We now control the best residential development pipeline in the region."

Toothman added that capital markets dislocation has created opportunities across all property types. "Residential, whether acquiring existing multifamily assets at a discount to replacement cost or prime entitled development sites stalled by the rapid rise in rates, is the most obvious opportunity for investors with perspective," he said.

Positioning for a Favorable Future

Andy Cohen, Managing Director of Development at BRP Cos., said that when navigating uncertainty over the last year, his firm has focused on deploying creative strategies to take advantage of the transition to a more favorable interest rate environment. "We've been actively involved in the development side of the market, and we continue to acquire development sites to ensure that we're in a position to move quickly when the timing becomes more optimal," he said.

Cohen noted that BRP maintains a diverse real estate portfolio, including affordable and market-rate units. "At the core of our business is the commitment to providing all tenants with great buildings that provide a wealth of amenity-rich offerings and best-in-class services, regardless of the market conditions," he said.

Building Purpose-Driven Portfolios

Michael Caracciolo, Head of U.S. Asset Management and New York Office at Ivanhoé Cambridge, emphasized that building a strong portfolio is critical to attaining balanced returns with a longer-term focus on diversification. "Our investment strategy is balanced among targeted opportunities to de-risk our portfolio, thematic value-add strategies with shorter hold periods to crystallize gains in a dislocated market, and portfolio optimization through capital recycling in areas of highest potential," he said.

He added that workplace strategies have transformed how tenants use space, making it essential to create a purpose-driven portfolio looking forward. "It goes beyond adding amenity spaces. It involves creating a holistic, streamlined ecosystem that minimizes friction for our occupants," he said.

Investing in Tenant Satisfaction

Jovana Rizzo, Director of Corporate Communications at The Durst Organization, said that to keep tenants satisfied, Durst not only maintains its properties but continually makes investments to improve them. "The office experience matters to tenants and their employees," Rizzo said. "At 825 Third Avenue, for example, we completed a $150 million renovation of the tower and added an indoor-outdoor amenity space. 825 Third Avenue is nearly 50% leased after Durst completely emptied the building to conduct the top-to-bottom renovation."

As the commercial real estate industry grapples with uncertainty, these leaders demonstrate that opportunities still exist for those willing to adapt and innovate. While challenges remain, their strategies offer a roadmap for navigating turbulent times and positioning portfolios for future success.