CRE Sees Signs Of Cautious Optimism In 2024, But Challenges Remain. Where Should Borrowers Turn?

The commercial real estate industry entered 2024 with a cautious sense of optimism. While the market in 2023 was driven by interest rate volatility and uncertainty, indications from the Federal Reserve that it could lower interest rates soon, paired with yields for the Treasuries being on a downward trajectory, suggest stabilization for commercial real estate, one of the hardest-hit asset classes, could be on the horizon. 

Brendan Shanahan, managing director at Slate Asset Management, said his firm views 2024 as a transitional year for CRE. 

“Credit is essential to the real estate market,” he said. “Without leverage, it is impossible for most players to transact. Last year was a year of uncertainty in terms of rates, values and more, and as a result, credit was scarce. Given 2024 should be a year of transition, we expect credit availability to improve slightly, but challenges will remain.” 

Greater clarity regarding Fed policy, discount and cap rates, and property valuations should help bolster CRE market participants’ transaction confidence as the year unfolds. These transactions will come in all forms, including traditional property and loan sales, which should create floor pricing for many assets and markets, Shanahan said. 

This floor shouldn't be interpreted as an all-clear signal but more a sign that stabilization is on the horizon, he added. 

“Many current CRE borrowers will need to rightsize current assets via equity infusions or workouts with existing lenders,” he said. “This will take time.” 

Slate Managing Director Desmond Vindici said the pressure on bank balance sheets will not only come from credit issues but also the adoption of new regulations. As a result, banks and insurance companies will likely remain conservative in their lending, particularly for complex or nuanced loans. This is why Vindici and Shanahan said they believe private credit firms like Slate continue to be the best option for CRE borrowers looking to find creative financing to support new acquisitions and solutions for existing assets.

“Slate takes pride in our proactive approach and ability to put ourselves in the shoes of our borrowers, given we are both an equity and debt platform,” Shanahan said. “Facing a dearth of availability from traditional capital sources, borrowers can seek out private lenders that are more willing to work with them to meet their needs without rushing to take back the keys from struggling assets.” 

Large banks have pulled back substantially from CRE lending, Vindici said. Regional banks are still active but face their own balance issues that will likely lead to a pullback in 2024, which means private credit lenders will need to step in and fill that gap. 

“We expect that to happen not only during the next year but for a number of years,” Shanahan said. “There will be significant opportunities for lenders who can step up to fill the equity needs that borrowers might have if banks are unwilling to do so.” 

During other times of economic turmoil, like the Global Financial Crisis, there was a lot of distress in the real estate market, Vindici said. But when looking at the overall default rate and the loss ratios that lenders experienced, those lenders who continued to work with their borrowers and their operators to find solutions ended up minimizing their losses compared to peers who were more aggressive in the foreclosure and liquidation process during the nadir of the economic cycle. 

“Because of this, we continue to think that as we manage our clients’ and borrowers’ needs, focusing on finding credit, as well as economic solutions, is the right approach in the current climate,” Shanahan said. “We continue to focus on cash flow, value reset and working with our borrowers to make sure they have capital to support the underlying collateral or to provide credit enhancement if needed.” 

When searching for the right private lender this year, communication is key, Vindici said. Borrowers should be able to understand a lender's decision-making process clearly, and lenders should understand a borrower’s context to come up with the best possible solution for an asset that may be feeling the pinch right now. Knowing what a borrower is trying to achieve through a refinance, acquisition or rescue capital will guide how a plan is structured.

“​​If you're a borrower and you're looking at a lender, you really want to feel like you have a partnership with them,” he said. “Obviously, those partnerships have guardrails and protections, as necessary, but having someone who can put their equity hat on is really important.” 

Looking ahead, Shanahan said Slate plans to continue to originate senior and mezzanine loans and seek out preferred equity investments that align with the firm’s credit standards. It will remain focused on properly structured credit deals, reset basis and strong borrowers. 

“We're going to continue to pursue opportunities in the market, but we're also going to be loyal to our credit standards and not put money out just to put money out,” he said. “In short, we want to make sure that it truly is the appropriate risk-adjusted return for the type of loans that we're looking at.”

The company plans to remain open to all properties and borrowers, however, and not avoid asset classes or property types that are disliked in the market today. 

“We view every single deal individually and believe that even some unloved asset classes are worthy of refinancing, especially if it's for the right sponsor with the right business plan,” Vindici said. 

This article was produced in collaboration between Studio B and Slate Asset Management. Bisnow news staff was not involved in the production of this content.

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