COVER STORY
10 Things to Look Out for in Commercial Real Estate in the Next 24 Months Jeff Holzmann chief operating officer at RREAF Holdings
By Jeff Holzmann
W
ith increased interest rates, a war
position. That lender has the option to fore-
4. So, are we all doomed? No, the market
in Europe and a divided political
close on the asset in case of default, ensur-
is always striving to find equilibrium and
landscape, everyone’s projec-
ing they return their investment and returns
historical data shows us that rates adjust and
tions for commercial real estate
before anyone else “up the capital stack”
correct over time. It’s been 40 years since we
in 2022 are out the window, and it’s time for
gets their part. These senior secured posi-
saw this kind of inflation, but we have rea-
some new assumptions. Large players are
tions are usually tied to market rates driven
sons to believe the market will stabilize even
updating their macroeconomic projections,
by inflation and interest rates. Now that rates
quicker this time. The main alternative for
and here is what everyone is thinking about,
are in the higher single digits, this means
commercial real estate developers is to pivot
and how it can impact you and your money.
the investment needs to turn a lot more prof-
from buying to building. This process in-
it to be able to pay off the senior secured
volves completely different sets of costs and
1. Everyone is in real estate. The largest
loan, and still leave some profit to the other
risks, and tends to increase supply, which
wealth in the world was either created or
investors like the second lien, mezzanine,
reduces cost, which leads to a lower cost of
preserved by real estate. It is a staple of any
preferred and common equity.
capital and hence has a stabilizing effect. Not everybody can do that, and unless you are a
economy. You are also invested in real estate, if not directly as an owner or investor in prop-
3. So, if debt is more expensive, how do
vertically integrated, experienced developer
erties or REITs, then through your 401(k),
we make up the difference? The only two
with the right know-how to build, then pivot-
your kid’s college fund, or even if you rent an
ways to increase the potential of real estate
ing the business may not be an option.
apartment. The market impacts you, your dis-
assets are by increasing revenues (usually
posable income and your retirement savings.
rent) and reducing expenses (usually im-
5. What about other asset types? Most
provements and services, since we can’t
asset classes in real estate depend on resi-
2. Interest rates impact real estate debt
control taxes, insurance, etc.). This equation
dents, tenants or guests to pay the rent. The
directly. Most commercial real estate deals
means that the higher the interest rate, the
multifamily sector is more diverse, spreading
are funded by a typical capital stack. That
higher landlords will attempt to raise the
the cost and risk across multiple units. The
stack is composed of different tiers of capi-
rents. This equation of “will rent increase as
office building model tends to be driven by
tal; the further up you move on the stack, the
much as interest rates” is what you’ve been
much longer leases and hence stable, but
higher the risk and the higher the potential
seeing on the news lately. Since rents are
offices post-pandemic are still on the fence,
return. The lowest part is referred to as senior
driven by market forces, it becomes a ques-
as more companies are adopting a virtual,
debt, meaning it is the most senior secured
tion of Supply and Demand in local markets.
remote or hybrid model, reducing the need
52 MANN REPORT | AUGUST 2022