Yes, interest rates have skyrocketed when you look at the last 10 years, but the reality is also that folks were able to be quite successful in the ‘90s, with interest rates hovering around 7%. The better questions will all involve sustainable and reliable long- or even medium-term use of space. As much as the pandemic proved that we can accomplish most of life remotely, it also proved that we don’t want to do so fully and all the time. Deals are better done face-to-face, even when they can be done on TV. Trust and confidence are better built in person, and compromise is reached more effectively in the same room. This will continue to accelerate in 2023, almost regardless of economic conditions.
Jeffrey Horwitz, Private Equity Real Estate, New York
Commercial real estate values are decreasing, especially B and C properties. As debt on these properties matures, and there is a lot set to mature in the next couple of years, borrowers will find it incredibly expensive to refinance. In many cases, even if refinancing is available, there will be increased risks of tenant defections and space reductions as leases expire.
Jeff Marwil, Restructuring, Chicago
We are undoubtedly in a period of price discovery. Whether it is a function of rising interest rates, concerns that we are already in a recession or that one is imminent, there is a general consensus that capitalization rates have expanded. The degree of that expansion, however, is very property-type and asset specific. Office assets, with the exception of the Class A assets, might at present, be the most challenged as a hybrid-work environment continues to be prevalent in many industries. The market is adapting however, as many full and partial office-to-residential conversions are taking place. We are also seeing the need for rescue capital, and there are many opportunistic investors seeking out those opportunities.
Steven Lichtenfeld, Private Equity Real Estate, New York
As we begin to recover from the COVID-19 hangover, it feels like older office buildings will continue to lose tenants and experience increasing vacancies. Newer office buildings, however, will continue to attract new tenants, but at very high TI costs.
Vincent Indelicato, Restructuring, New York
In London, there was a strong rebound of the commercial property market earlier in the year, especially office space, notwithstanding hybrid-working practices. This was, in part, driven by large enterprises looking for new and quality space as their existing leases came to an end. However, as of late, with more pronounced gathering economic woes – including the rise in interest rates – many expect a softening in the market and a noticeable drag on transactions.
Adrian Cohen, Restructuring, London
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