Commercial Observer Finance Editor Cathy Cunningham sits down with Yahoo Finance’s Diane King Hall to discuss the impact of the Covid-19 pandemic on the real estate industry, commercial real estate trends, and what lies ahead for investors.
Video Transcript
DAVE BRIGGS: The commercial real estate industry is grappling with work from home challenges, higher interest rates, and the consumer slowdown. All were hot topics at the Commercial Observer Spring Financing CRE Forum today. Our very own Diane King Hall was there. Diane, sounds like an awful lot to talk about.
DIANE KING HALL: Indeed.
DAVE BRIGGS: Not a lot they want to talk about.
DIANE KING HALL: I know.
DAVE BRIGGS: Not real favorable environment.
DIANE KING HALL: Right. How do you solve a problem like the woes of the commercial real estate industry? The real estate industry in general, but again, this session focusing on commercial real estate difficulties stemming going all the way back to the pandemic now to a difficult interest rate climate.
We talked to Cathy Cunningham, who took us through a bird’s eye view of the challenges the industry is facing and what’s ahead. This is Cathy Cunningham. Let’s take a listen.
CATHY CUNNINGHAM: I think the last year has been a very volatile year. We’ve seen a lot of capital sources retrench. So we’ve seen the banks retrench. We’ve seen the CMBS Commercial Mortgage Backed Securities market really not be as efficient as it normally is. The CLO market, Collateralized Loan Obligation also not efficient.
So what it’s done is really whistle down the available financing pool to a very select group of lenders. Now, the flip side to that is that these lenders now really have– they can cherry pick the best deals for them. So competition is very scarce, which also works for them. So there’s opportunity in the clouds, you could say.
DIANE KING HALL: So how would you characterize the deal landscape now?
CATHY CUNNINGHAM: It really is asset type specific. I would say I think multi-family and industrial, which are really the most coveted asset classes during COVID, continue to be the asset classes that investors are flocking to. On the other side of that, office, especially class B office is the asset type that nobody really wants to finance today. So a lot of concerns about the maturing office loans are coming due soon.
DIANE KING HALL: And so class B, I have heard that class B buildings are struggling more now, class B, class C. But in particular for class B since you see more and more companies calling people back to the office, can that help or is it still just the troubles are too much right now for that sector?
CATHY CUNNINGHAM: I mean, I think it definitely can help but I think the troubles in that sector are so pronounced now because of COVID. What COVID did was really kind of change the power dynamic also. Almost where the tenants are now the people with the power and they can demand what they want from a property. So really only the best, flashiest, greenest, most attractive buildings are securing tenants.
So it’s really been a flight to quality within the office that we’ve seen now for a few years. And this feels almost like the boiling point for office where the worst, or not the worst, or the least attractive office buildings are applying for their– they already struggled for a few years and now they can’t get financing. So it’s not a good situation.
DIANE KING HALL: Commercial real estate was deeply affected by the pandemic as many other industries and it’s a struggle to recover. Do you see it– has it completely changed how commercial real estate operates or do you think there will be a move back to how it was pre-pandemic?
CATHY CUNNINGHAM: I think it’s probably a change that we’re going to see last for a long time. I think what COVID did in terms of the real estate market is really give real estate a chance to breathe and really kind of figure out everybody’s portfolios, what they look like, what tenant demand looks like. And that flight to quality was really the theme.
So when it comes to office especially, flight to quality. When it comes to the asset classes they’re performing well I think people are far more diversified post-COVID in terms of not having their portfolio completely weighted toward office. And I’ve been seeing a lot of office owners now pivoting away slightly from office to multi-family, industrial, even retail just to basically diversify their holdings more. So I do think that the pandemic was a fundamental change for our industry in terms of just changing the landscape of what commercial real estate looks like and is used for.
DIANE KING HALL: And speaking of multi-family, what are you seeing with regard to plans for conversion especially with– we did an interview with Bill Rudin, and he…
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