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Real-Estate Deal Making Slows as Bank Lending Tumbles

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Wall Street is tightening loan plugs in the commercial real estate industry, which are squeezing deals and value.

Banks reduce lending and impose higher interest rates on owners and buyers of office buildings, shopping centers and other commercial real estate. The tightening is in response to the sharp rise in interest rates this year caused by high inflation and concerns about a recession that could lead to higher defaults.

Manus Clancy, Managing Director of Data Company Trepp Inc, said:

In the second quarter of this year, banks issued $ 20.6 billion in securities backed by real estate loans, according to Trepp. This is down from $ 29 billion in the first quarter. June market sentiment was particularly negative after the Ministry of Labor reported. Significant rise in the consumer price index“Inflation didn’t easily hit the ground,” Clancy said.

In June, banks issued only $ 3.6 billion in commercial real estate securities called secured loan debt. This is from an office building to a hotel. According to Trepp, when there were $ 8.9 billion in such issues in this high-risk category, it was less than half the volume in February.

Most real estate is highly leveraged, so commercial real estate relies heavily on debt.Real estate when interest rates were close to historically low levels last year Sales volume reached record high..

This year, higher inflation has led to higher interest rates, which has slowed sales growth. In the second quarter, investors bought $ 190.3 billion in commercial real estate, up 17% from the same period in 2021, according to data firm MSCI. According to MSCI, this is down from a 150% increase in sales in the second quarter of 2021.

“”“It’s a small building in Toledo or Poughkeepsie. These transactions were the first to fail in response to this financial shock.

— MSCI’s Jim Costello

Meanwhile, the number of transactions in the second quarter of this year fell to about 8,500, down 22% from the same quarter in 2021. This shows that rising interest rates are having a major impact on larger volumes of smaller transactions. Rather than dealing with high price tags, according to Jim Costello, chief economist on MSCI’s physical assets team.

“It’s a small building in Toledo or Poughkeepsie,” Costello said. “These transactions were the first to fail in response to this financial shock.”

Higher rates put pressure on value as well as volume. Real estate analyst Green Street says commercial real estate prices have fallen by an average of 5% from their March peak.

Meanwhile, according to Green Street Managing Director Dave Bragg, stocks in real estate investment trusts are traded at an average discount of 11% on the value of the real estate they own, and stock market investors are valued. Indicates that we believe that will go down further.

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“There is a risk that prices will continue to fall,” he said. “If investors agree with us, that may be one of the reasons they hesitate to buy now.”

Many deal makers are still active. For example, Regent Property, which was closed with the purchase of the Trammel Crow Center in Dallas in March, is considering buying another Sunbelt office building, said Eric Fries, CEO of the company.

Lenders are “more focused than ever” on higher quality properties and operators, Mr. Fries said. “If the loan costs more, we need to take that into account,” he said.

But he added: Affects the price. “

Historically, sharp drops in real estate prices have hit commercial real estate transactions as buyers have become bystanders and sellers have resisted price cuts. In the past recession, it took more than a year for sales activities to normalize.

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According to Jeff Scott, managing director of Eastdil Secured, the market may be adjusting faster than usual this time around. He said one sign of this was a “widespread” price revision. That is when the seller, who has signed a contract with the buyer before the sharp rise in interest rates, agrees to renegotiate the lower price.

“Think about it. I used to borrow at a low price of 2%. [range.] Now you are renting in the low 5% range, “he said. “It’s just math. You’re not the one trying to use it.”

Some big companies are starting to gather battlefields to take advantage of future market turmoil. for example,

Black stone Ltd.

In The final stage of raising a new real estate fund It will probably set a record as the largest vehicle of its kind.

Blackstone executives said in a statement last week that the fund had already closed with a $ 24.4 billion commitment. Blackstone president Jonathan Gray said the new fund, along with other corporate capital, will provide Blackstone with $ 50 billion for global real estate transactions. “Given the current environment, this is a great advantage.”

Write in Peter Grant [email protected] And at Rebecca Pisiotto [email protected]

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