According to a survey of 200 investors and investment managers conducted by tech-enabled commercial real estate lender Money360 earlier this year, equity market volatility, rising interest rates, credit spread compression and other factors were sending them toward the relative stability of physical assets like real.
But as many estimates indicate an economic correction or even downturn could begin toward the end of 2020, the robust development cycle that has rebounded us from the Great Recession could be about to close down. The question then for those investors is whether the accessible funding that we’ve witnessed in recent years will continue.
Gary Bechtel, president of Money360, has weathered many market shifts in his more than 20 years of experience in the industry. According to him, any derivation from the real estate market’s recent performance should be minor, and investors should continue undeterred as we head into next year.
“Though we’re experiencing a historically long bull run, it’s important to recognize that the underlying economic fundamentals remain strong so a market correction is unlikely to be as pronounced as past corrections,” Bechtel said. “We continue to see strong demand for commercial real estate development and redevelopment, and we expect this to continue into 2019. As asset valuations reach new peaks, we expect interest in debt instrument exposure in real estate to rise over equity positions and other alternative investments, better protecting an investor’s return.”
Though no one foresees a drop-off akin to 2008-2009, development and transaction velocity will slow when this cycle ends. When that occurs, it likely will affect the types of loans that borrows seek out or that lenders make available.
“We’re seeing increased demand in bridge financing, however, borrowers are seeking longer-term bridge loans—as long as five years—suggesting borrowers want to stay with alternative lenders through more of the lifecycle of their real estate transition period, including redevelopment, re-tenanting and stabilization,” said Bechtel.
Investors in industrial projects, especially big box properties, have been printing money on the strength of the sector while retail mostly has been in a nosedive, broadly speaking. There are no real indications currently that the current demand for the various asset classes will alter course drastically.
“Both the industrial and multifamily sectors have strong demand pipelines going into 2019 driven by migration patterns across the U.S.,” Bechtel said. “We’re seeing large growths in populations across major metropolitan areas as well as secondary markets, which leaves cities grappling with both housing shortages and less developed distribution logistics to meet changing demand demographics.”
In many respects, Chicago has matched or even outperformed like-kind markets around the country recently. So what’s the outlook next year for the city and its region, and which asset classes will be strongest locally?
“The Chicago MSA continues to experience excellent performance in most property sectors in relation to the rest of similar sized markets of the country and I expect this to continue through 2019,” said Bechtel. “Office, industrial and multifamily appear to be leading this trend, as in other markets.”
Money360 supports an online marketplace/peer-to-peer lending platform that connects borrowers to both traditional and alternative lending sources. As similar fintech firms populate the marketplace, there are more options for investors, but also more potential hazards.
“Financial regulators have given non-bank lenders the freedom to innovate within certain parameters, and the industry has stood up in many ways to self-regulate,” said Bechtel. “However, increased capital demands in commercial real estate has given rise to less experienced lenders, and if a bear market does loom, it’s crucial to apply experience from past market corrections to ensure stability moving forward.”
“As this industry continues to mature, I’d like to see non-bank lenders take steps to ensure their borrowers and investors are positioned to thrive in changing economic conditions through stricter underwriting and investing standards,” Bechtel said.