On September 15, the Chicago Chapter of The Society of Industrial and Office Realtors (SIOR) hosted its fall Speaker Series luncheon at Gibsons Restaurant in Rosemont, Illinois. Ryan Moen, SIOR, principal and co-founder of Versa Real Estate Services, moderated a panel discussion featuring Krista Casper, senior vice president at Associated Bank; Michael Tenteris, executive managing director at Cushman & Wakefield; and James Postweiler, executive managing director at Newmark.
The discussion focused on the state of the capital markets in commercial real estate and the event brought together more than 60 SIOR members and guests.
Moderator Moen began the discussion by citing interest rates changes and the toll they have taken on underwriting in all asset classes. In March 2022, he reminded the audience that the Fed had raised its federal funds benchmark rate by 25 basis points, to the range of 0.25% to 0.50%. The rate hike marked the first increase since 2018.
As panelist Casper puts it in her opening remarks, a lot has changed in how banks are looking at deals due to the rate changes that have occurred since March. A focus of Associated Bank is interest reserves and in looking at what the worst case can be. “We often will ask the developer to put in extra money because the bank is expecting interest rate increases.”
In terms of acquisition loans, Casper says it depends on “what your source of debt usually is,” but traditional banks, she said, always underwrite a higher interest rate of at least 6%. As the interest rates continue to rise, that number will likely go higher, she added. “Sources that are not as conservative as traditional banks will have to change their underwriting.”
Interest rate increases are also influencing cap rates widening out. C&W’s Tenteris said that from March until July, pretty much every conversation was a re-trade conversation. Since then, he said, the active buyers who are showing up are primarily all cash or low leveraged buyers as well as the big balance sheet buyers. “If you are a 65% borrower—if you can even get that now—you are having a real hard time competing to buy anything.”
What is being offered to the market right now are smaller transactions, panelists explained, noting that the big deal market is, in essence, not even there anymore. According to Tenteris, “CMBS is pretty much frozen… Insurance banks had a busy first part of the year so, if they are even putting out loans, it is for their best customers.”
On the debt side in general, the lender pool has evaporated, panelist Postweiler noted. “Life companies are gone from our business,” said. “It is hard to find hard money lenders. We are getting to the point where some of the coupons that we are getting quotes from are pushing 9%.”
The panel transitioned to discuss how having multiple banking relationships have never been more valuable. According to Casper, with so many sources drying up, Associated Bank, is seeing so many deals so there is a lot of opportunity. “One thing we are looking at are strong relationships so now is the time you see that having multiple banking relationships is valuable.”
Casper continued that one bank might not be doing any speculative industrial, while another bank might not be doing deals over $30 million. “Associated Bank, for one, is focused on saving the capacity that it has for its best customers who have been with them a long time. We are focused on relationships and when other sources are dry, that is when your banking relationships really come through for you.”
Switching gears, panelists talked about leasing risk in the office market and tracking discussions surrounding return to office. Panelist Postweiler explained that while the leasing reports might show terrible news at the moment, there are positive signs pointing to good data and good trends. “There is confidence in the coming quarters on the leasing side.”
Moderator Moen added that he is also not seeing any meaningful changes in the smaller office floor plans of under 20,000 square feet. “I expect to see higher office occupancies in the coming quarters.”
Switching to the industrial sector, in terms of sales, there is still plenty of liquidity in the market and investors are going back to the basics, said Tenteris. “Buyers are down about 15%-20% from 2021, but 2021 was an anomaly where the volume that happened was insane,” he said. “What is clearing are well located quality assets and investors are back to asking questions they had not asked for about 24 months such as: What is access like? Is the building functional? What business is my tenant in? What is the tenant credit? Investors are doing what they should and are paying attention to the real estate.”
In terms of investor sentiment moving forward, generally panelists say that sentiment has changed. “We are at a much more conservative underwriting and exit caps are expanding out a little bit,” Tenteris explained. “There is probably a slowdown in the economy coming if we aren’t in it already so you have to imagine that there will be a slowdown in demand over the next six to 12 months.”
Other key takeaways from the event included:
- There has been increase in note sale volume
- Auction sites are seeing some success with the rapid speed of execution
- Gateway markets are still preferred and premier in terms of volume of investment and activity
