In the tumultuous world of commercial real estate, navigating market volatility is akin to riding a roller coaster – it's exhilarating, unpredictable, and requires strategic thinking to ensure a smooth journey. As we delve into the dynamics of the current commercial real estate landscape, it becomes evident that understanding market shifts and knowing when to seize opportunities are paramount for success.

The commercial real estate market is renowned for its volatility. Economic shifts, geopolitical events such as pandemics, and industry trends all contribute to the rollercoaster-like experience that lenders and stakeholders endure. However, despite its unpredictable nature, the commercial real estate market presents lucrative opportunities for those who can navigate its ups and downs effectively.

Market Volatility: What are we seeing in the market?

Amidst the ebbs and flows of the market, banks play a pivotal role in shaping the commercial real estate landscape. Once hesitant to exit problem credits, banks now face the music as liquidity dries up, regulators increase pressure, and higher interest rates render once bankable companies unable to service their debt.

For new credits to the bank, most are requiring new deposits that are 10 to 30 percent of the debt request. Historically banks would be amenable to starting a credit only new relationship, but the current banking environment is driving a more holistic “full relationship” approach that requires deposits, treasury and credit. So, if there are no deposits, it’s generally a decline from the bank.

This shift has prompted a wave of deal-making, with increased referrals flooding in from various channels – bankers, brokers and beyond. But can we capitalize on these deals?

Partnering with Asset-Based Lenders: Unlocking Opportunities

In navigating the volatile commercial real estate market, private lenders can find strategic opportunities by partnering with asset-based lenders. These partnerships can provide access to additional capital and expertise, allowing private lenders to expand their deal flow and mitigate risk.

Asset-based lenders specialize in providing financing secured by collateral, such as accounts receivable and inventory. By partnering with asset-based lenders, private real estate lenders can leverage their expertise in assessing collateral and structuring deals. This can be particularly valuable in situations where traditional lenders are hesitant to extend credit due to market volatility or perceived risk.

In addition to providing insight into client performance, a private real estate and ABL partnership can create the right “deal club” in order to provide a full take out of bank debt. Oftentimes it takes multiple lenders working in concert to produce a successful bank exit.

Record Deal Volume and Bank Pullback

Amidst the changing landscape, private commercial real estate lenders are witnessing record deal volumes, largely driven by the pullback of traditional banks in lending. As banks tighten their lending criteria and become more cautious in the face of economic uncertainties, borrowers are increasingly turning to alternative sources of financing. Private lenders, with their ability to offer flexible terms and expedited processing, are stepping in to fill the void left by traditional banks.

This surge in deal volume presents both opportunities and challenges for private lenders. On the one hand, it allows them to capitalize on the growing demand for alternative financing solutions and expand their market share. On the other hand, it also requires them to carefully assess the risks associated with each transaction and ensure that they maintain prudent underwriting standards.

Property Valuations by Asset Class: What We're Seeing

The office market grapples with challenges, witnessing reductions in value and lenders finding themselves upside down. Meanwhile, stability reigns in the industrial sector, offering a beacon of hope amidst the turmoil. Retail, however, remains a case-by-case scenario, with each property requiring careful consideration.

The performance of different property sectors varies significantly in response to market conditions. In the office market, for example, challenges abound as remote work trends and economic uncertainties weigh on demand. As a result, property valuations have seen a downward trend, with lenders finding themselves at risk of being upside down on their loans. Conversely, the industrial sector has proven to be more resilient, benefiting from e-commerce growth and increased demand for logistics space. Retail properties, on the other hand, present a mixed picture, with certain segments thriving while others struggle to adapt to changing consumer behaviors. Overall newer retail, in growing submarkets within a metro area, priced reasonably, are doing fine.

Identifying the Right Types of Clients in a Volatile Market

As deal flow surges, it's imperative to focus on quality over quantity. Properly valuing collateral and assessing the strength of management teams are essential steps in mitigating risk. Examples of valuing both property and management teams underscore the importance of due diligence in client selection.

In a volatile market, identifying the right types of clients is critical for success. While deal flow may increase during periods of market volatility, not all opportunities are created equal. To follow are a few examples of clients we have financed:

• We were referred to a commercial HVAC company from a factoring company. Despite historical losses Flatbay felt comfortable due to commercial real estate collateral and an experienced management team. They utilized our refi cash out of their owner occupied commercial real estate in order to buy materials and hire labor for several large upcoming projects. Without our cash they would not have had the liquidity to support their growth.

• Similarly, we provided financing to an avocado importer facing challenges when a regional bank decided to exit the relationship due to debt service coverage violations. With strong collateral and the financial backing of their international parent company, we felt confident in providing a refinance of all of the bank debt.

However, not every deal yields the desired outcome. We financed a retail property in a secondary market and when our client decided to shut down their business, we were left trying to exit through the collateral. Location matters in the real estate world, and there simply aren’t as many willing buyers in smaller markets.

One key aspect of evaluating potential clients is properly valuing collateral. In commercial real estate transactions, collateral typically takes the form of real property, such as land, buildings, or other improvements. Properly valuing this collateral requires a thorough understanding of market conditions, property characteristics, and potential risks. For example, a property located in a highly desirable area may command a higher valuation than a similar property in a less desirable location. In addition to valuing collateral, it's also important to assess the strength of the management team involved in the transaction. A strong management team can help mitigate risks and increase the likelihood of success, while a weak management team can increase the likelihood of problems and complications. Examples of valuing management teams include evaluating their track record, experience and expertise in the relevant market or industry.

By focusing on quality over quantity and thoroughly evaluating potential clients before committing to a transaction, lenders can mitigate risk and increase their chances of success in a volatile market.

Conclusion

In the ever-changing world of commercial real estate, it’s important to have a balanced viewpoint. By staying abreast of market trends, understanding the nuances of commercial real estate transactions and diligently evaluating potential clients, lenders can position themselves to thrive amidst the volatility. So, the next time you're eyeing that commercial real estate rollercoaster, remember – with the right strategy, it's not just a ride, but a journey towards success.