By Joy Wiltermuth
Financing is returning to commercial real estate ahead of 2025, if mostly on temporary terms
Investors have been lifting the wobbly U.S. commercial property market back to its feet ahead of 2025, bolstered by the monster financing this fall of an iconic property in the heart of New York City.
October saw a $3.5 billion, five-year refinancing of Rockefeller Center in Midtown Manhattan, led by lenders Bank of America (BAC) and Wells Fargo (WFC) and completed on behalf of co-owners Tishman Speyer and Henry Crown & Co. – the largest office financing of its kind in history.
Despite serious challenges for older office buildings, the new debt deal, which replaced a maturing 20-year loan on the “city within the city,” was a blowout with investors.
“I think it was extremely important,” said Christopher Battistini, senior fixed-income analyst at Thornburg Investment Management, which oversees $47 billion in assets and was one of many firms that bought mortgage bonds tied to the refinancing of Rockefeller Center.
“This is a large swath of land in New York City,” Battistini said. While categorized as an office financing, the 7.3 million-square-foot complex also includes Radio City Music Hall, retail, dining and the famed Rockefeller Center ice-skating rink. “In terms of size, scope and scale, there were a lot of eyes looking at it.”
Capital is back. It costs.
When the music stops in the $22.5 trillion commercial real-estate market, it’s typically because funding has dried up.
Opinions might vary as to whether property prices bottomed in 2024, but it’s clear that funding has returned five years after the pandemic upended commercial real estate almost overnight.
Debt funds, in particular, have been looking to fill a greater lending role than in the past, said Diana Brummer, co-chair of the law firm Goodwin’s real-estate industry group. “There are more opportunities than there used to [be],” she said of financing outside of the traditional banking system.
The failure of several regional banks KRE in 2023 has kept a spotlight on risks for lenders related to commercial real estate, a significant area of concern for Congress and banking regulators. Still, loan volumes were poised to increase 26% this year from a year before to $539 billion, according to the Mortgage Bankers Association.
That’s important for 2025, because a revival in lending after years of weakness should help put a floor under prices. The type of debt deals being seen – shorter-term funding, in many cases – matters too, because many buildings remain bogged down in debt and could face significant stumbling blocks on their road to a full recovery.
Rents, occupancies, income, rates and property values all have been moving in the wrong direction for all but select pockets of landlords since the pandemic. A notable exception has been the high demand – and climbing rents – at a few coveted trophy office towers, where prime rents nationally have topped $100 and even gone as high as $247 per square foot.
Yet the bigger picture has been one of price declines, especially for hard-hit offices in central business districts, which had tumbled 50.7% in October from three years before, according to MSCI’s RCA commercial-property price index.
“Over the last 15 years, the smartest thing to do was the riskiest thing, because central banks would make sure that everything went up” in price, said Michael Acton, head of research and strategy for North America at AEW Capital Management, a real-estate investor with about $86.4 billion in assets under management.
After the Federal Reserve cut its policy interest rate to almost 0% four years ago, financing rates for landlords dropped to about 3.5% on average in 2021, according to a KBRA tally of loan terms in bond deals. The average this year has been about 6.74%.
“We’re back in a world where capital has costs to it,” Acton said.
A five-year grace period
There has been an added urgency for borrowers to secure financing or modifications of existing debt as more than $1 trillion in older commercial real-estate mortgages comes due over the next two years.
Many owners will face higher all-in borrowing costs, given the drop in property prices and potential limits to how much the Fed can cut interest rates in the years ahead.
Against that backdrop, lenders have kept a lid on reviving “permanent” financing options, like the 10-year fixed-rate loans BX:TMUBMUSD10Y that dominated the industry for decades.
“Five years or less is still very, very popular,” said Trey Morsbach, co-lead of real-estate firm JLL’s (JLL) national debt business, noting that more lender types were bidding on financing opportunities in recent months than at the start of 2024.
Shorter commitments protect lenders from making extended bets on the future, while giving borrowers a temporary lifeline. They also give landlords more flexibility to sell a building or to refinance if rates drop.
Still, jitters around plans by the second Trump administration for lower taxes, more tariffs and mass deportations could keep upward pressure on inflation, which could limit Fed rate cuts in 2025.
Related: Why Powell and the Fed should pause interest-rate cuts in December
Similar to the “lost decade” in stocks SPX after the dot-com bubble, prices for U.S. commercial properties can take years to recover from a major downturn, making access to capital vital for landlords trying to wait out the process.
“We’re looking at probably the best entry point in commercial real estate in probably 15 or 20 years,” Acton at AEW said. “Yields are the highest they’ve been in over a decade, values are below were they were before COVID, and. when adjusting for inflation, they’re lower than they were at the end of the [global financial crisis],” he said, referring to the 2008-09 downturn.
“If you don’t have capital, you’ve got a real problem,” he added.
-Joy Wiltermuth
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12-10-24 1235ET
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