As we navigate the final quarter of the year and prepare for 2023, two words come to mind: “What’s next?”
Uncertainty can be uncomfortable, but it gives us an opportunity to plan our next and best move.
As we adjust to an ever-changing economy and its impact on the commercial real estate industry, it is important to pay close attention to new patterns, upcoming trends, and viable predictions.
To help you navigate through the market, we sat down with Michael A. Rosenberg, a partner at Chaves Perlowitz Luftig LLP, for an enlightening Q&A discussion about the recent trends in Commercial Real Estate and how to best adapt during this time.*
With interest rates continuing to climb in the residential market, how do you see this affecting the commercial market?
The initial impact will slow the number of transactions as well as the amount of loans being made by commercial banks. The cost of transactions and of borrowing funds will be higher, which will reduce the demand of investors (to purchase) and developers (to contract projects). I do not, however, believe this will be a permanent change. We have lived with ultra-low rates for many years now, which have artificially set the “market” rates lower than what is feasibly sustainable. Once the market accepts the interest rates at higher single digits as the actual norm, I think the appetite for transactions and projects will resume.
Have banks been more diligent in KYC?
Yes, indeed. I have seen many banks requiring more searches and information on the borrowers, guarantors and controlling parties, whether financial or credit related. Banks have been analyzing all results with greater scrutiny and as a result, are generally making less loans in terms of volume. As lenders start making less loans, the scrutiny will continue to grow. A positive result from the additional scrutiny is stronger borrowers and guarantors, which may provide lenders with greater confidence in their loan portfolios.
Have banks raised their threshold for certain requirements due to the recent market?
Yes, we have seen banks increase certain requirements for making loans. For example, the ongoing covenants are getting stronger and more personal recourse (whether partial or full) is being taken. The non-recourse loans being made seem to require more property-specific scrutiny based on the changing market.
How have you adapted to a world of remote closings? Do you find that it is easier or more challenging to work remotely with clients/lenders/title, etc.?
While I have been doing remote closings with lenders and borrowers for many years, since COVID started, remote closings have become more widely accepted and practiced by the industry. Naturally, there are some challenges, like reliance on technology and delivery services, but their overall experience seems to be positive. We understand borrowers generally like the process because they can continue to operate in their daily schedules while remotely closing real estate loans. Title companies have become very proficient and more able to assist with the logistics. While many in-person “table” closings will still occur, I predict that the shift to escrow closings will continue and remote closings will become the standard.
The market is changing—there is no way around it.
As the world changes, so does the landscape of Commercial Real Estate. As we enter a new frontier, one fact remains: Commercial Real Estate remains a critical investment asset.
So what changes are you hoping to see?
Get to Know Michael A. Rosenberg
A partner of Chaves Perlowitz Luftig LLP, Michael focuses on Commercial Lending. Michael has spent over 18 years handling sophisticated commercial loan closings while managing a team.
Michael focuses on representing institutional lenders in commercial real estate financing transactions. Clients initially come to Michael for his experience and reputation within the field and continue to return for his charisma, negotiation skills, and a keen eye for details.