Market trend
2023 marked a turning point in market sentiment as the CRE industry faced rising interest rates, geopolitical instability, and the threat of economic recession. These factors impacting liquidity have kept investors cautious, resulting in delayed decision-making. Despite economic pressures, asset-based financial instruments such as CRE CLOs have shown resilience and performed well even in a high interest rate environment. CRE CLOs include variable rate loans and are actively managed. This means that the sponsor or collateral manager can add or remove loans during the reinvestment period. This flexibility is one reason why CRE CLOs likely outperform conduit trading.
Collateral managers have received many requests for modifications and relief to help issuers manage pools of mortgage loans and protect investors while giving borrowers room to execute their business plans. Again, the uncertainty of how long interest rate increases will continue poses challenges in determining the optimal loan modification package. Other forms of asset-backed financing, such as warehousing, remain healthy, and traditional bank warehouse lenders still accept deals with good locations, tenant mix, and low leverage.
In terms of assets supporting transactions, the office space sector has taken a hit in 2023 as companies struggle to reassert the pre-pandemic status quo of normal office working. The uncertainty felt by office landlords is having an impact on lenders. Therefore, common business practices such as valuation and valuation are in flux, even though future demands are not yet clear. The insurance that bond investors need is also now expensive and difficult to obtain due to the increase in extreme weather events caused by climate change, and is likely to remain so.
However, CRE is a diverse asset class that spans a variety of real estate options, of which office is just one part. Deals focused on industrial space such as warehouses, energy, and data centers are sought after, where rent growth rates remain high.
