Dwindling Transactions, Lender Clampdown Make CRE Environment 'A Massive Slap In The Face'

The cloud of rising interest rates, inflation and general economic gloom hanging over the country is causing havoc for people trying to do deals right now and is a rude awakening for some in the industry after years of cheap capital.

Transactions have slowed, making it hard to determine property values, ACORE Capital Managing Director of Capital Markets and Syndications Brent Wagner said at Bisnow's Los Angeles State of the Market event at the Millennium Biltmore Hotel.

Wagner recounted an investment committee call the morning of the event discussing a potential deal on the Westside of LA. 

“That appraisal is 2 months old,” Wagner said. "Well, it’s useless."

“There are no comps taking place,” he said, which made it more difficult to figure out how much they should be paying.

Additionally, several panelists said banks are largely at a standstill, having paused their commercial real estate lending. 

“It’s a massive slap in the face for everybody to get comfortable with that new environment,” Wagner said. 

On a national level, big banks have taken a step back from lending to commercial real estate, Bisnow previously reported, with one expert estimating as much as a 50% drop-off in the second half of 2022.

“I would say now is the time to lean on those banking relationships you’ve built up over the years,” Wagner said. “If you have deposits with a bank, that’s the group that’s going to get your deal done.” 

But regardless of banking relationships, everyone is subject to the interest rates and volatility that make pricing unpredictable.

“If you're borrowing money, and all of us do, your fixed rate is no longer at 5%, it's at 7%,” Sonnenblick Development Chairman Bob Sonnenblick said. “That has to have an effect on the price of any kind of existing asset, but it hasn't yet repriced. So the market is kind of stalled right now. Once sellers understand that us buyers who are financing things have a higher cost of funds, I think you're gonna see prices come down.”

That is a good thing, Sonnenblick said, calling the prices for LA real estate “insane.” 

Meridian Capital Senior Managing Director Seth Grossman said prices were already dropping. 

“Every single deal I have in the pipeline right now that's been in process for more than six or eight weeks has had not one but multiple price adjustments,” Grossman said. “I had a deal close last week that had five different price adjustments that occurred since March.” 

Those price adjustments weren’t because of rising interest rates but the result of volatility affecting the pricing and his capitalization cost, Grossman said, noting that the fluctuations began in the spring, before interest rates started rising.