It continues to be an interesting period in the Greater Phoenix CRE market. There is money and demand in the marketplace, and deals are happening. As has been the case all year, cash is king: Financing is difficult to acquire, and high interest rates can make it a challenge for institutional and private investors to drive worthwhile returns. Because they are not reliant on leverage to make deals happen, cash buyers can focus on cash-on-cash returns rather than leveraged returns with high interest rates. Taking a broader national perspective, the current environment puts Phoenix right in step with two overall trends:
Trend #1: The Bifurcated Market
In the wake of the Fed’s recent 25-basis point cut, Raj Aidasani, managing director at the CRE Finance Council, described the current commercial real estate market as bifurcated: “High-quality assets continue to attract capital while challenged properties face refinancing hurdles,” he told CoStar News. “The Fed’s likely pause after this cut suggests we’re entering a period where property fundamentals, rather than monetary policy, will drive market activity.” While he anticipates improvement in financing conditions for favored asset classes, the office segment will continue to be a challenge. His comments also fit the property owners in the Valley who would like to hold on to their assets but are struggling with the financing end as well.
Trend #2: Loans at Risk
While commercial mortgage-backed securities (CMBS) loans are generally larger than the types of loans that we see financed through our local commercial banks, Trepp’s November 2024 CMBS Delinquency Report is instructive as far as what sectors are most at risk: The overall national delinquency rate increased 42 basis points to 6.40%, which is still well below the all-time high of 10.34% registered in July 2012 and the COVID-19 high of 10.32% in June 2020.
The report notes: “This month, the office, multifamily, and lodging property types all saw substantial increases in the sector-specific delinquency rates. The office delinquency rate surpassed 10% in November, increasing about 100 basis points to 10.38%. There were multiple large newly delinquent office loans that drove the office delinquency rate higher, with the office sector making up 60% of the net change in delinquent loan amount in November.” While multifamily delinquencies are only at 4.18% nationally, that represents an increase from just 1.33% in April 2024.
In the Phoenix market, we are not seeing lenders necessarily declare default because that can trigger a series of actions that they might not be prepared to deal with, such as taking over and re-tenanting office buildings.
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