Commercial Real Estate Unlikely to Rebound in 2023

Being on the other side of Labor Day means fall is near, even if the weather doesn’t cooperate fully. The end of the year isn’t here, yet, but it’s taking shape, and not a favorable one for some real estate sectors.

The past several months have been difficult for office and multifamily investors, who, for the most part, have gotten hammered.

One major concern is the doom loop, where losses on loans lead banks to cut back on lending, furthering a drop in property prices and more lender losses. 

Banks’ exposure to the tumult in commercial real estate is worse than often reported, according to an analysis by the Wall Street Journal. The implications could be seismic, for banks, real estate and the economy.

From 2015 to 2022, direct lending by banks doubled to roughly $2.2 trillion, pushing property prices up on the backs of small and mid-size banks. The WSJ analysis put total bank exposure to commercial real estate at $3.6 trillion, which it estimates is 20 percent of their deposits.

WeWork, which has been reeling for years now, told its landlords on a conference call last week that it will try to renegotiate “nearly all” of its leases. The company faces staggering losses that have led to speculation that it will file for bankruptcy.

During the five-minute call, the company said that its leasing costs remain too high and it will look to exit underperforming locations.

A company spokesperson said WeWork intends to remain in its buildings, but needs more flexibility with leases to clean up its dire financial situation.

Things looked equally bleak on the multifamily front.

In Los Angeles, developers are curbing their enthusiasm for building due to market conditions.

Many firms are no longer interested in building there, and the multifamily pipeline is quickly drying up. 

“It just doesn’t make sense to build,” said Artem Tepler, one of Schon Tepler’s two founding partners.

After spending their entire 14-year career developing dozens of apartment projects in L.A., Tepler and his partner, Paul Schon, are — at least for now — no longer looking for new projects in L.A. at all. 

“We love this city, and we want to do bigger projects here,” Tepler said, “but at this point it’s just becoming harder and harder to do business here. It’s easier to get on a plane and do a build in Texas than it is to do it in our own backyard.” 

In Chicago, an investor picked up a 237-unit multifamily portfolio on the South Side for almost $12.3 million in foreclosure sales that closed late last month. The portfolio consists of 10 buildings across the Grand Crossing, South Shore, Woodlawn and Washington Park neighborhoods, and was previously owned by Adam Walls, the CEO of the real estate firm 5812 Group.

The sale price came in below the total amount of the mortgages that 5812 ventures owed on the properties, which was almost $17.6 million, and even less than the $26.4 million total allegedly owed on the debts with fees and interest, according to the foreclosure suit. The debts were originated by Wells Fargo before getting packaged up with other loans and sold off to investors in commercial mortgage-backed securities markets.

In Texas, MF1 Capital foreclosed on a Houston property, after the owner, apartment syndicator Rockstar Capital, defaulted on a $51 million loan.

Rockstar is in default on a loan tied to 8900 Lakes at 610 Drive in Houston, a complex called Aspire at 610, according to a notice of trustee’s sale.

In New York, loan servicers filed foreclosure suits Friday against four buildings owned by City Skyline Realty, which defaulted on $26 million in debt.

The Upper Manhattan properties — 174 West 137th Street, 507 West 139th, 510 West 148th Street and 505 West 161 Street — are all rent-stabilized.

The defaults could signal a greater wave of distress for owners of rent-stabilized buildings struggling against the financial straits of New York’s 2019 rent law.

The legislation capped revenues and the recoupable cost of renovations. That was followed by a Covid exodus and eviction moratorium; soaring operating expenses, including insurance, utilities and maintenance; and a jump in mortgage rates.

In four years under the state’s Housing Stability and Tenant Protection Act, the value of rent-stabilized buildings has plummeted anywhere from 20 to 45 percent, said Shimon Shkury, founder of brokerage Ariel Property Advisors, which specializes in rent-stabilized deals.

While the hope is the markets will heat up as the weather eventually cools, 2023 is a year many investors are eager to put behind them.