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Oct 18, 2023

Current Lending Conditions Leading into 2024

With the current climate of debt capital markets and interest rates, Daniel Ismail, Green Street Managing Director and Co-Head of Strategic Research, provides his take on the correlation between capital flows and commercial real estate metrics.  

He begins by addressing the banks’ tightening credit standards, as banks play a critical role in commercial real estate finance. With the established macro uncertainties and lending environment, Ismail uses the CMBS market and data to read through for broader commercial real estate debts. 

Ismail: Debt capital to real estate has slowed dramatically. It's not to say that markets are necessarily frozen, but if you look at how banks are lending to commercial real estate or how the CMBS market is behaving, there's a clear deceleration from the levels seen in ’20, ’21, and ‘22. Now if you look at bank lending or CMBS lending, there's again some activity but it’s significantly down.  We'll likely continue to see depressed levels as not only the appetite to lend but also the appetite to borrow is significantly down compared to prior years. 

If we turn to the equity side of commercial real estate, equity flows have slowed dramatically as well. Fund flows to closed-end funds, open-ended funds and non-traded rates have had a rough go with the last 18 months. Overall, fundraising for all forms of commercial real estate vehicles is seeing clear deceleration from ‘21 and ‘22 levels. But there's also positive news looking towards ‘24.
One is, that fund flows in aggregate have not turned negative. The second is, there's a large amount of capital raised over the past few years that is still sitting on the sidelines waiting to be deployed. That means, there is a large cushion to support future transaction activity and values. 

Ismail further discusses the public market’s difficulty in equity issuance, concluding that the REIT market has not fared any better in terms of capital flows.  

What is the overall importance of capital flows in regard to commercial real estate?

Ismail: The punchline for caring about capital flows is that there's a decent correlation between the availability of financing, financing outcomes, and changes in commercial property values. The availability of debt, as measured by bank lending standards, is correlated to fundraising outcomes for closed-end funds. The ease of getting debt is correlated with changes in property prices, which is then correlated to fundraising success.  

There's a lot of “chicken and egg” about what's coming first. But in general, tighter lending conditions point to a tougher market for would-be borrowers. And tougher lending standards point to weaker asset prices, which again signal a continued tough environment for capital raising. So regardless of which is going to come first, or which needs to change first, as long as these conditions persist, market dynamics are expected to continue to be challenging. Although these market downturns may seem discouraging, Green Street’s real-time data analyses and research reports are constantly providing insight on early warning market signals, empowering you to seize opportunities and confidently navigate the market. 

This is simply a taste of the actionable takeaways we deliver to our clients every day and the unique way Green Street views commercial real estate from a macroeconomic perspective. Our insights are rich with conclusion-driven intelligence and top-quality, proprietary data. Incorporating up-to-date research and analysis like this is invaluable to crafting an effective CRE strategy. Speak with a member of our team today to learn how you can use Green Street’s research and intelligence in your strategy.   


Looking for more insight in the meantime? Check out Green Street’s insights page to listen in on our team explain Real-Time U.S. Commercial Property Price Indexes.