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Taking stock of CRE capital markets

Billy Fox
Billy Fox

Few industries feel the impact of higher interest rates more than real estate. The ups and downs of the mortgage rates in the residential real estate market generate their share of headlines, but the commercial real estate market has been hit by higher rates in recent years as well. Add in trends like remote work

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Arthur covers banking and finance and the economy at BizTimes while also leading special projects as an associate editor. He also spent five years covering manufacturing at BizTimes. He previously was managing editor at The Waukesha Freeman. He is a graduate of Carroll University and did graduate coursework at Marquette. A native of southeastern Wisconsin, he is also a nationally certified gymnastics judge and enjoys golf on the weekends.
Few industries feel the impact of higher interest rates more than real estate. The ups and downs of the mortgage rates in the residential real estate market generate their share of headlines, but the commercial real estate market has been hit by higher rates in recent years as well. Add in trends like remote work and population shifts and there are a lot of challenges for real estate investors. To help make sense of current trends, the 2024 BizTimes Media Commercial Real Estate and Development Conference featured a presentation by Billy Fox, senior vice president at Brookfield-based MLG Capital. Fox focused on the current state of the capital markets, particularly in the multifamily sector. Ahead of the event, Fox shared insights with BizTimes: BizTimes: Broadly, what is the current state of the capital markets, especially as the Federal Reserve has begun cutting interest rates? Fox: “Real estate is a very debt dependent and capital-intensive asset class. Higher interest rates and higher costs of capital have weakened investor demand and pricing for private real estate. “Many institutional investors have been allocating more to fixed income – than equities or alternatives like private real estate – to re-balance their portfolios after their fixed income returns have declined with higher interest rates. Retail’s investor capital has fled to high-yield savings accounts and private credit to satisfy their cash flow needs and their allocations to private real estate have gone down. A recent RA Stanger Report showed investments into nontraded REITs, like Blackstone’s BREIT and Starwood’s SREIT, are on track to be $6.3 billion in 2024, which is roughly 18% of their peak fundraising in 2021 of $34.4 billion. Conversely, investments into BDCs, like Blackstone, Ares and Blue Owl’s private credit vehicles has grown from $14.2 billion in 2021 to its current trend of $35.5 billion in 2024.” Are there any distinct trends emerging across the industrial, office, retail and multifamily markets? “Office is challenged. Office entered the pandemic weaker than the other asset classes and has suffered numerous hard hits including reduced demand and a shift in demand for office space coming out of the pandemic, less debt and equity available for investment and higher tenant improvement costs. Of course, there are exceptions, but generally the asset class is suffering.” “Multifamily is experiencing softness from an operations and capital markets perspective. Operationally, the asset class is being negatively impacted from excess supply that is being delivered throughout the country, creating higher vacancy and concessions; an increase in delinquency as COVID cash has left tenants’ bank accounts and inflationary pressures have resulted in less discretionary income and savings; and landlords are fighting elevated expenses (especially taxes and insurance).” How are investors looking at different geographies? Are markets like metro Milwaukee and others across the Upper Midwest in a good position relatively speaking? “Midwest multifamily is receiving more attention than in years past. The excess supply that’s caused higher vacancy and concessions is primarily concentrated across Sun Belt markets. Similarly, tax and insurance increases have generally been greatest in Sun Belt markets. Midwest multifamily is largely outperforming the Sun Belt.” The Commercial Real Estate and Development Conference also featured a unique Developer Fantasy Camp that offered three teams of developers the chance to imagine new uses for the former Northridge Mall site on the northwest side of Milwaukee. The teams included Scott Lurie, founder of F Street Group, with Ariam Kesete, CEO of AK Development; Bob Monnat, senior partner at Mandel Group, with Michael Adetoro, managing partner of FIT Investment Group; and Scott Yauck, president and CEO of Cobalt Partners, with Stephanie Mercado, supplier diversity supervisor at Michels Corp. Milwaukee Department of City Development commissioner Lafayette Crump also participated in a discussion with Andy Hunt, director of the Vieth Institute for Real Estate Leadership at the Marquette University College of Business Administration. Look for additional coverage of the event at biztimes.com. The Commercial Real Estate and Development Conference was made possible by sponsors Building Advantage, CLA, Husch Blackwell and Johnson Financial Group; exhibit sponsors Innovative Signs and JLA Architects; and event partners Marquette University Vieth Institute for Real Estate Leadership and the Commercial Association of Realtors Wisconsin.

Market

Multifamily Vacancy Rate

Sun Belt Markets

Austin

15.1%

Jacksonville

13.8%

San Antonio

13.4%

Atlanta

12.4%

Charlotte

12.2%

Raleigh

12.0%

Nashville

11.8%

Midwest/Wisconsin Markets

Milwaukee

5.1%

Madison

5.1%

Green Bay

2.7%

Minneapolis

6.8%

Columbus, Ohio

7.8%

Kansas City

7.6%

As of October 2024. Source: CoStar

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