Elon Musk recently took to Twitter in response to the Kobeissi Letter, a reputable authority on market commentary. The original post made note of the fact that in the next five years, more than $2.5 trillion in commercial real estate debt will mature, “… by far more than any 5-year period in history.”
Musk went on to comment that the rise in defaults among commercial and residential loans could “hammer” banks. This remark comes on the heels of the collapse of Silicon Valley Bank on March 10, the second-biggest bank failure in U.S. history and the ripple effect that followed. The aftermath, certainly a byproduct of these institutions betting on interest rates without protecting themselves against the risks associated with them.
While an influx of defaults could certainly harm banking institutions, this is the fear-mongering I advise my team and my clients to avoid. Reading headlines or, in this case, Tweet threads, rooted in the “demise of the market,” tend to create false pretenses that sway investment decisions, often when they shouldn’t.
When this back and forth was unfolding, mortgage demand rose 2.9% compared to the week prior and the average contract interest rate for 30-year fixed-rate mortgages with loan balances of $726,200 or less, decreased from 6.48% to 6.45%. While the applications to refinance did experience an uptick, it’s still 61% lower year over year and mortgage applications to purchase a home rose 2%.
I operate with a realist mindset, but I also leave room for the qualitative and its capacity to influence sometimes even the seemingly predictable market trends. Let’s look at the retail industry, for instance. Back in the 80s, more than half of our retail transactions unfolded inside shopping malls. While e-commerce first emerged in 1979, it erupted with the introduction of Book Stacks Unlimited, an online bookstore created by Charles Stack in 1992. That store was eventually acquired by Barnes and Noble but would ultimately serve as a catalyst to the online experience we know today.
Now, many would have you believe that leases are in trouble, space is going to sit empty and that shopping malls are a thing of the past, but the model simply needs to change. Research from Glossy and Modern Retail coined the “Great Mall Overhaul” and made the call for a pivot, the evolution from transactional to experiential. Those that survive will have effectively made the leap from a merchandise hub to a lifestyle center, offering both shopping and entertainment experiences. What does this sound like to you? An opportunity for commercial real estate investors and developers? I think so too.
Let’s take a look at office space. The pandemic shone a light on hefty overhead costs and the
effectiveness of remote working models. Today, it is estimated that approximately 51% of employers have adapted to a hybrid work model. The need for square footage may have declined but there is a need for space in that equation just the same. Again, while headlines may have you thinking that this sector is also in trouble, these factors may suggest otherwise:
- Many employers are urging their employees to return to offices, at least for a portion of the workweek.
- Workforce demands appear to be centered on better office amenities, flexible space, etc. Did someone say, “lifestyle center”?
- Vacancy rates are expected to decline in the year ahead, or stabilize at the very least.
- While rate hikes may suggest some volatility, certain sectors such as multifamily housing, industrial and office have experienced substantial growth compared to last year.
Once again, I’m a realist and I understand that there are several sides to every story but I encourage you to look at the factors through a holistic lens. We can’t keep turning to 2019-2022 as a benchmark — we were experiencing unprecedented times. Let’s assess and keep a pulse on the here and now. Sure, there is evidence to suggest a possible recession, but there is just as much intel supporting the opposite.
We’re seeing improved conditions related to cost of capital, space availability, vacancy levels, leasing and transaction activities, and even rates. If we succumb to the panic, we’ll only contribute to the manifestation of a scenario that I am confident none of us want to revisit. Let’s keep the 2008 market where it belongs — in the past.
My advice? Position yourself as THE subject matter expert when it comes to navigating the nuances that may impact a deal. Operate as your clients’ advocate and encourage them to function with the mindset that every opportunity is unique, because it is. Don’t leave them to guess — every time they fire up a laptop or turn on their television, they’re inundated with headlines, biases and predictions that could change at the drop of a rate. It’s up to you to serve as their guide — some of these potential buyers are navigating these waters for the very first time. Don’t leave it up to them to translate the noise they’ll likely encounter on their voyage.
David Brooke was a real estate appraiser for 11 years prior to becoming an agent, starting with Engel & Völkers in 2011, then joining Berkshire Hathaway in 2013, then Keller Williams in 2015 before becoming a part of eXp in 2020. Today, his team produces over $200 million in sales, a result of eXp’s commitment to empowering agents and David’s leadership, a methodology that is rooted in education and amplifying personal brands.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the author of this story:
David Brooke at [email protected].
To contact the editor responsible for this story: Tracey Velt at [email protected].
