2023/2024 Real Estate Investment Outlook

Connect CRE hosted the 2023 Investment and Finance conference on Oct. 24, 2023 with NAI Hiffman Executive Vice President – Office Investment Sales, Adam Johnson (pictured above, far left) featured on the Industry Leaders Investment Insights panel.

In an afternoon of insight and networking, industry leaders and experts voiced their observations on what to expect for the future of commercial real estate investment and finance.

NAI Hiffman Senior Associate – Capital Markets, Tom Gnadt, along with Johnson provided their biggest takeaways from the conference.

Distressed Property Trends Panel

• All the servicers expect to see an influx of deals that will take many years to go through. The office deals will take the longest to recover depending on usage and availability of capital to refinance deals.
• Many borrowers on the office side are not putting up a fight and handing keys back.
• They don’t expect to see as much CMBS issuance on the office side in the near term, given there are not many stabilized deals being sold and CMBS does not provide the working capital that many investors need in the office sector.
• Rapidly increasing insurance costs in coastal areas have drastically increased operating expenses and, in turn, decreased debt service coverage ratios for a lot of owners.
• The consensus on Chicago is that office is going to be extremely hard, but the city is resilient. Strong labor force, younger population and affordability are all major tailwinds, but we need to get crime and taxes under control.

Industry Leaders Investment Insights Panel

• The hotel sector has been recovering well based on travel and usage rates. The hotels that are struggling and going back recently were heavily levered prior to the pandemic and can’t recover given the new interest rate and capital requirements in todays market, which will provide opportunities for cash rich buyers.
• Medical continues to show good demand from tenancy and investors. There is a push for hospitals to move services off campus providing good credit developments. Construction pricing continues to make ground-up a little difficult.
• There are office opportunities for smaller tenant buildings that have a higher usage rate than larger corporate users. The capital stack will be the largest challenge as many banks are on the sidelines for office.

Navigating the Capital Markets and Financing Options Panel

• Capital is tighter amid banking regulations that will effect sponsor and higher capital requirements for financial institutions. There will be opportunities for debt funds and bridge lenders to step in although you will see rates 500-600 basis points above SOFR.
• Alternative lending sources are gaining more and more steam due to tighter spread from traditional rates.
  • Alternative lenders are not being overly ambitious, though. Before, they were doing one out of every 10 deals they were looking at and now it’s closer to one out of every five deals on average.
  • Alternative lenders are still in same boat where you need a strong sponsor with a good track record.
• Sponsors need to over-communicate with lenders. They need to be in front of the lender with any expirations coming up or concerns about assets in order to work through them as opposed to addressing things as they happen.
• Goal remains for all lenders to not have to take buildings back and work with sponsors but they will do it if they have to.
• Most activity is coming from medical and retail as of late.
• Senior housing has become one of the hardest asset classes to finance right now. Historically lower caps have upended leverage due to operating cost increases, liability and labor shortages.

Adam Johnson
Executive Vice President – Office Investment Sales
630-317-0729
ajohnson@hiffman.com

Tom Gnadt
Senior Associate – Capital Markets
630-693-0659
tgnadt@hiffman.com

About NAI Hiffman:

NAI Hiffman is one of the largest independent commercial real estate services firms in the US, with a primary focus on metropolitan Chicago, and part of the NAI Global network. We provide institutional and private leasing, property management, tenant representation, capital markets, project services, research, and marketing services for owners and occupiers of commercial real estate. To meet our clients’ growing needs outside of our exclusive NAI Hiffman territory, we launched Hiffman National, our dedicated property solutions division, which provides property management, project services, and property accounting services across the country. NAI Hiffman | Hiffman National is an award winning company headquartered in suburban Chicago, with more than 250 employees strategically located throughout North America.

About Hiffman National: 

Hiffman National is one of the US’s largest independent commercial real estate property management firms, providing institutional and private clients exceptional customized solutions for property management, project management, property accounting, lease administration, marketing, and research. The firm’s comprehensive property management platform and attentive approach to service contribute to successful life-long relationships and client satisfaction. As a nationally bestowed Top Workplace, and recognized CRE award winner, Hiffman National is headquartered in suburban Chicago, with more than 250 employees nationally and an additional six hub locations and 25 satellite offices across North America.