☠️ Lending Hits Historic Lows Amid Rising Interest Rates and Economic Uncertainty

Good morning,

Lending hits historic lows amid rising interest rates and economic uncertainty; Nashville keeps its #1 spot as top RE market; and SITE Centers spins off strip malls amid surge. Let’s delve into today’s topics.

📈 Market Update

☠️ Lending Hits Historic Lows Amid Rising Interest Rates and Economic Uncertainty

Capital markets are experiencing significant volatility, with lending reaching historically low levels and sparking concerns of rising defaults and a decrease in new construction projects. This downturn began in 2022 with the Federal Reserve's interest rate hikes and has been exacerbated by soaring Treasury bond yields since August 2023. Major banks have shown a decline in commercial property lending, with total loan volume dropping notably in October 2023. Additionally, commercial mortgage-backed securities issuances have hit their lowest since 2011. The scarcity of financing is impacting various sectors, particularly office owners, and while loans are still available, they come at a higher cost and from fewer lenders.

History Repeats Itself:
While a brighter market outlook prevailed in late 2022 and early 2023, driven by favorable economic indicators, the rapid increase in U.S. 10-year Treasury yields and inflationary pressures have introduced fresh uncertainties. This scenario mirrors past cycles, such as the 2007-2008 period when initial optimism gave way to economic concerns, mainly influenced by fluctuating interest rates. As we approach 2024, the commercial real estate market grapples with whether prices will descend due to the recent spike in Treasury yields, reminiscent of historical patterns, and highlighting the significance of narratives in steering capital flows.

👑 Nashville Keeps Its #1 Spot as Top RE Market

Nashville, Tennessee retains its crown as the prime U.S. market for real estate investors for the third consecutive year, fending off rising stars like Phoenix and Las Vegas. While the Sun Belt remains attractive, high-growth cities like Nashville and Austin grapple with the challenges of strained infrastructure and rising living costs. Meanwhile, Florida markets see a dip in rankings, driven in part by insurance concerns. As the commercial real estate industry adjusts to post-pandemic realities, a notable decline in office space demand emerges, prompting discussions on repurposing strategies, the future role of technology, and changing employment dynamics.

Industrial Surging in California:
California's industrial property market is booming with significant rent growth, especially in the Inland Empire, Los Angeles, and Orange County. Phoenix is capitalizing on this trend, serving as an overflow market for Southern California, and evolving as a manufacturing hub. Nationally, industrial sales declined, but California remains dominant. In contrast, the Midwest grows more slowly, with the South led by rent increases in Miami, Atlanta, and Nashville. Dallas-Fort Worth and New Jersey are other noteworthy markets due to construction and sales respectively.

🛒 SITE Centers Spins Off Strip Malls Amid Surge

SITE Centers is creating a new real-estate investment trust, Curbline Properties, to manage its 61 strip-mall properties, highlighting the increasing value of these assets in the hybrid work era. These malls, which aren't anchored by major stores, have become more frequented, with visits rising 18% last year, as remote work reshapes suburban shopping patterns. Consumers now prioritize quick in-and-out errands close to home, benefiting establishments such as coffee shops, delivery services, and other convenience-driven businesses. The move underscores the evolving nature of suburban commercial spaces in a post-pandemic world.

✍️ Further Reading

• Inflation Is Entrenched and Rates Will Be Too (CS)

• Cushman & Wakefield Reports Loss as Real Estate Deal Activity Slides Further (CS)

• CBRE Says No Recovery Until Second Half of 2024 (GS)

• CMBS Delinquency Rate Moves Higher Again in October 2023, Hits New Post-COVID Peak (Trepp)

• Mortgage Rates at 8% Make a Brutal US Housing Market Even Worse (BBG)

• Zillow Plunges After Verdict on Real Estate Brokerage Commissions (BBG)

• Vornado Likely Ditching Casino Plan (RD)

📊 Chart of The Day