CRE Bankers Are Optimistic About The Future
As the coronavirus vaccine rollout continues and Americans begin to return cautiously to offices, restaurants, shops and traveling, commercial real estate investors and developers are starting to make plans for the year ahead. While there is still a great deal of uncertainty surrounding certain asset classes, particularly office and retail, CRE managed to stay in remarkably strong shape during the past year, with relatively stable asset valuations and some sectors experiencing a further rise in value.
Well-capitalized borrowers, lenders and, by extension, the Federal Reserve, deserve much of the credit for keeping CRE afloat.
“This has been different than other recessions,” said Kathy Farrell, who serves as head of commercial real estate for Truist Bank. “We had regulatory support that allowed us to work with our clients and help them weather the storm.”
Farrell and her colleagues at Truist are now focusing on the future and looking for new ways to help their clients move past the challenges of the past year and toward new investment and development opportunities.
There’s Money On The Sidelines
In addition to accommodative policies during the pandemic, Kris Dickson, Truist’s head of commercial real estate corporate and investment banking, said another factor contributing to the optimistic outlook for CRE is the amount of cash sitting on the sidelines.
CRE private equity funds entered the pandemic with record levels of cash, and those balances have continued to grow despite a slowdown in fundraising. REITs are also operating at low leverage levels and with improved costs of capital.
“Funds and REITs are well-positioned to become more acquisitive," Dickson said. "Amidst the pandemic, the majority of acquisition activity was in the industrial and residential sectors, as Covid accelerated already-favorable trends.”
Dickson said it is highly competitive to acquire such assets and that it is likewise competitive to finance them.
“With an improving economic outlook and a return to more of our pre-pandemic lifestyles, we are beginning to see activity increase in other sectors as buyer-seller valuation expectations become more aligned, M&A activity and dialogue are up, and the U.S. CRE market remains attractive relative to other global investment opportunities," he said.
Multifamily And Industrial Continue To Soar
Farrell said that while some clients remain hesitant to embrace office and retail, they are diving headfirst into industrial and multifamily. Joe Pella, who is the interim head of national commercial real estate at Truist, added that people should remain optimistic about these two asset classes, but the locations developers and investors may be interested in could start to shift.
“When it comes to multifamily, we've seen an accelerated shift toward suburban and tertiary markets,” Pella said. “Many people have attributed this shift to the pandemic, but it has actually been going on for the past few years, and I believe this trend is likely to continue.”
Truist operates heavily out of the Southeast, and Farrell said she believes that this shift to suburban markets will mean big things for the area.
“If people can work from anywhere, why not move to a place where the climate is pleasant and the cost of living is affordable?” she said.
Pella said, however, that this shift doesn't mean things are over for urban markets. He noted that he is starting to see improving multifamily fundamentals in urban areas, which is driven by the rapidly approaching return to the office.
While some companies are sticking to full-time remote work, others are encouraging employees to come back to the office for the collaboration and productivity benefits that come with working together. This has led to the return of car traffic, Pella said, and with that, the return to people looking for apartments closer to work so they can avoid the commute while enjoying many of the amenities that come with urban living.
He added that optimism should also remain high for industrial.
"The pandemic has clearly accelerated the shopping habits of today's consumer to online," Pella said. "Industrial real estate is poised to continue its record-breaking run as companies' logistic networks build out scale and efficiencies."
Hospitality Is Coming Back
Hospitality was among the hardest-hit asset classes during the pandemic, but Pella is seeing reasons to be optimistic that it is on an upswing. He said that leisure travel is generally driving the recovery to date, and Truist’s hospitality clients have even begun to increase their rates due to the strong demand. It remains to be seen when business travel will come back in full force, but Pella said that most cities already have rolled back or announced a rollback in restrictions and are beginning to see a return of convention travel. Pair that with the return of summer events like Fourth of July concerts and hospitality is poised for a major comeback.
“Demand and optimism in hospitality is increasing to the point that clients are beginning to ask, 'When is it time to talk about new construction projects?’” Pella said.
Farrell said that she and her colleagues share that optimism and are eager to get back to the work of helping their clients fund exciting projects.
“There is light at the end of the tunnel,” she said. “We’re ready to move forward.”
This article was produced in collaboration between Truist and Studio B. Bisnow news staff was not involved in the production of this content.
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