R.O.I. Real State – Commercial Newsletter – October 2023
Posted on November 20, 2023
In the Current Environment, It’s All About Financing
Deal volume is down significantly in the Greater Phoenix commercial real estate market. Transactions are still happening, but usually not with third-party financing. Instead, the trend continues to be toward seller carry-back financing, which we’ve discussed in several issues of The Real State this year. The other scenario that we are seeing more of, particularly in the multifamily sector, is the use of assumable loans/financing. Depending upon when financed and the terms, a buyer may be able to assume a loan with a rate in the neighborhood of 3%-4.5% rather than current market rates of 8%+.
In the current environment, many owners are running up against some very strict time deadlines to either refinance—which is not promising, because it adds significant cost—or to sell a property before the loan terms out. If you are a seller who is willing to carry back some money, or is fortunate enough to have assumable financing on your current loan, you have a saleable asset. If you are in a position where you have neither, and can’t find some form of alternative financing, then your options are more limited. You will need to price your property on a cash-sale basis, or be prepared to lower your price.
For buyers, the situation is reversed. Cash is king, as always, and offers the smoothest route to formulate a deal. It’s all about getting creative in structuring a win-win deal, which may involve the seller carrying-back financing, or checking for existing assumable financing. Be sure to explore and understand the existing financing terms on the product that that is of interest to you.
Phoenix is not alone in the challenges hitting commercial real estate, with banks pulling back on lending activity across the country. According to CoStar, loans on nonresidential properties declined 3.8% in September 2023 compared to August 2022, and an estimated $1.9 trillion in commercial real estate loans will mature in the next four years—47% of which are on bank balance sheets. While the office market remains the area of biggest concern, formerly hot markets such as industrial and multifamily are also seeing a more cautious approach from lenders. “Banks are starting to say ‘We need to watch [the multifamily market], let’s be more cautious about the loans and the refinancing we’re doing,'” Chad Littell, national director of capital market analytics at CoStar, recently told the Phoenix Business Journal.
The Federal Reserve’s October 2023 Financial Stability Report also struck a note of caution: “Aggregate CRE prices measured in inflation-adjusted terms continued declining through August. Capitalization rates at the time of property purchase, which measure the annual income of commercial properties relative to their prices, have increased modestly from recent historically low levels but have not increased as much as real Treasury yields, suggesting that prices remain high relative to rental income.”