Sam Sidhu is the CEO of Customers Bank.
Talk of commercial real estate often turns to the market’s recent challenges, in particular high-profile issues around office space and the uphill battle to return to pre-pandemic leasing and valuation levels. But investors and operators would be remiss to paint the entire market with a single, broad stroke. This is an industry that, given some continued pressures, requires a more precise, pinpoint approach to finding success as a lender—and success can be within reach.
Buoyed By Growth, Rate Expectations
In the near term, capital availability and conditions for commercial real estate (“CRE”) are expected to remain tight. Many regional banks and other lenders remain too concentrated in the industry, with their CRE portfolios flirting with or above the supervisory guideline of 300% of risk-based capital. This is limiting some banks’ abilities to support existing and potential clients with lending needs. It has also prompted the sale of pooled loans in a bid to rein in that exposure. While pooled loans may provide an attractive financial transaction, selective lenders are likely to eschew these opportunities to avoid tying up capital in portfolio loans without a strong or fulsome relationship.
Generally speaking, CRE fundamentals are in reasonably good shape as 2025 gets underway, and continued economic growth is anticipated, which should help the market. Of course, eyes will focus on the Fed’s actions in the coming months. Higher medium-term rates in recent periods may have dissuaded some CRE investors, impacting more challenged properties and further restricting the available capital in the market. Investors are watching for some easing; however, unlike short-term rates, medium- and longer-term rates will shift less in response to changes in the Fed Funds Rate. However, permanent lending can provide more stability and predictability, which shows its value in times of uncertainty.
Opportunities Abound In Select Assets
Although some areas of CRE should continue to work through challenges in 2025, many others are making strong arguments for lending and investment. Prospects appear to be promising in multifamily housing, mixed-use, industrial and retail assets, but the potential is somewhat uneven, geographically speaking. Operating in such a variable market requires local and regional expertise, as lenders with boots on the ground often have an inside track on conditions and opportunities unique to a specific community and properties.
In the tri-state area—New York, New Jersey and Connecticut—multifamily remains a strong asset class as developers work to meet demand, and mixed-use projects are drawing interest as they often contribute to more vital communities. These areas are examples of why CRE will almost always be a viable investment. Communities from coast to coast rely on it for aspects of everyday life, from housing and services to jobs and healthcare. It’s up to building owners and developers, however, to assess the market’s needs and find ways to pivot and fulfill them.
Strategic lenders are also paying attention to industrial, retail and some healthcare originations. These areas are exhibiting some growth, particularly class A spaces, as leasing agents overall are seeing a gravitation toward newer construction and modern amenities. Depending on location, however, such trends could be creating more challenges for class B and C properties. Additionally, selective lending is the reality for office space for the near-term, although there are some expectations that this long-suffering area may be reaching an inflection point and could eventually embark on a long-awaited recovery as return-to-office initiatives continue and adaptive reuse business plans for obsolescent spaces are executed.
Capital Is Tight, Deployed Selectively
Although capital for CRE may seem hard to come by, some banks are still lending in the space. Institutions that have maintained a conservative and consistent approach to CRE may be relatively underexposed and have room to explore originations for properties that meet their strict criteria. For some of these lenders, success hinges on more than servicing a loan; it hinges on the potential to develop a full banking relationship over time that can benefit all parties involved.
This relationship focus is another reason why some financial institutions may not be tempted by the pools of CRE loans on the market. Such loans come without a trusted foundation between partners in lending, as there is no clear history of a borrower’s circumstances or evolving needs. Selective CRE lenders are finding success in focusing first on building a relationship, and some have developed a rapport with clients over multiple generations and market cycles. Beyond financing, these banks can offer deposit, treasury management and other services that can strengthen the borrower’s overall prospects.
The underlying fundamentals of the CRE market indicate that there is reason for optimism ahead, and selective lenders will be seeking opportunities to support projects with potential. Taking time to develop a strong and strategic lending partnership can pay dividends down the line, as parties can all benefit from its associated stability over time.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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