Lending Maturities, Multifamily Rent Prices, and the AI Boom

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Welcome to the CRE News Digest from First American Title NCS, where we explore the biggest stories in commercial real estate. As a legacy brand working in CRE for more than 120 years, First American keenly knows the market and the forces that are impacting our clients’ businesses.

Big Picture: Banks

Heavily predicted in 2023, commercial real estate experts expect another rough year as the industry faces a reckoning for extended loan debt. In 2023, $541 billion in commercial loans matured, according to Capital Economics; however, the consequences from these maturities were softened due to extensions. Many lenders looked to this “extend and pretend” strategy with hopeful eyes, but experts are wary that the $2.2 trillion of CRE debt maturing between now and 2027 could cause these borrowers distress when extensions run dry this year.

The potential of additional CRE distress has recently caught the attention of the Securities and Exchange Commission (SEC). The regulator has been increasingly concerned with banks’ exposure to CRE loan portfolios because of the increased risk of these maturities triggering failure. In an effort to avoid failures, the SEC sent out letters in January to banks, financial firms, and holding companies requesting “more clarity in their disclosures around the potential consequences” of CRE lending failures. “The SEC is worried that some of the banks may not be disclosing as much of their risk or exposure as they should to their investors,” Kenneth Chin, a partner at law firm Kramer Levin Naftalis & Frankel, told The Wall Street Journal.

 Although some market experts believe that the Fed will cut interest rates this year, relieving lending distress in CRE markets, defaults and late payments are on the rise and commercial properties are currently facing an intense price slump.

 State of the Sector: Multifamily Rent

Debate over the current state of the multifamily sector continues. According to First American Senior CRE Economist Xander Snyder’s recent analysis, apartment rents in previous pandemic hot spots are on the decline. Not only did the pandemic drive geographic shifts in demand for multifamily buildings, but it also created a surge in multifamily construction. As new apartment supply is introduced across the nation, cities with an influx of new multifamily construction without the demand to fill them will see downward pressure on rent, slowing rent growth or lowering rents overall. “In cities where the absorption of the new excess stock of apartments is slow, rents will fall as landlords try to fill more units,” explains Snyder.

But is this decline enough for rent prices to be affordable to the average renter? Even with rent decline and slow growth, rent costs are not expected to return to pre-pandemic levels, forcing financially strained tenants to look for alternative solutions. Harvard Joint Center for Housing Studies reported that half of Americans spend over 30 percent of their income on housing, with pressure increasing fastest for middle-class tenants. While increased supply from recent multifamily construction will provide some relief, the report explains that “the people who are most cost-burdened are not going to see the immediate benefits of that supply.” This is due to much of the new construction targeting the higher end of the market and a decrease in lower-cost units due to landlords chasing higher rents and selling properties. Overall, experts are expecting to see a decline in multifamily rent prices in specific geographic areas but it may not be enough to provide relief to all tenants across the nation.

 Innovation: AI

Like many industries right now, AI is at the forefront of CRE conversations and solutions in early development. Basil Demeroutis, managing partner of developer Fore Partnership, told Bisnow that his firm uses a variety of AI tools to improve efficiency in its work. Of these tools, Demeroutis highlighted an identification tool for construction constraints on a specific development site and a mechanical and electrical planning tool that saves 20 percent in design costs. While firms are currently focused on AI during planning stages of building development, many experts believe that it will expand to streamlined appraisal processes and building sustainability efforts.

AI is also offering some relief to the struggling office sector. In San Francisco, AI startups and established companies are filling up recently empty office space to take advantage of the technology’s exploding business. In 2023’s fourth quarter, San Francisco’s office vacancies fell to 32 percent, an all-time low for the city, according to Alexander Quinn, senior director of Northern California research at JLL. By the end of the year, AI companies had leased 3.9 million square feet of office space, a 50 percent increase from the previous year, making up around 28 percent of leasing activity within the office space. Quinn credits this increase to the collaborative culture of tech startups, the AI industry’s overall expansion in the past year, and tech talent near Silicon Valley.

 



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