Lower commercial real estate transaction activity is having a direct impact on lending in the US, with originations falling as the number of obstacles the market is facing rises.
“There has been a drastic slowdown in loan originations across the board,” said Edward Fernandez, founder and chief executive officer of Irvine, California-based 1031 Crowdfunding.
Fernandez projects that 2022 will end with about $2.8 trillion of loan originations completed and believes that number will drop to $2.3 trillion in 2023. This is a stark contrast compared with 2021’s record-breaking $4.4 trillion in mortgage originations, according to a Mortgage Monitor Report compiled by real estate data company Black Knight, based in Jacksonville, Florida.
“[This drop suggests] originating loans are in direct correlation to what the real estate markets are doing,” Fernandez added, noting this data signals activity is slowing down. He also believes inflation, a major attributing factor to slowing market characteristics at present, is here to stay.
“As more money floods the country and people start spending more money, inflation continues to be rampant,” said Fernandez. “If the Federal Reserve continue to raise interest rates aggressively, we are going to see a softening across the board, not only in commercial real estate but also residential real estate.”
Fernandez does not see inflation settling down until the end of 2023. “Once we get inflation settled, and the Feds can take its foot off the gas when it comes to interest rates, only then can we settle things in the real estate market as well as the debt market,” he added.
Another key concern in the market environment is legal and political differences between states, with Fernandez observing real estate sponsors selling assets in states with more oversight in favour of jurisdictions in which they have more control of their assets and business decisions. Parts of California and New Jersey as well as New York, Boston and Chicago are performing well but sponsors have less latitude around evictions.
“That’s why we are seeing Texas, Georgia, Tennessee, [and] Florida real estate markets booming,” Fernandez said, noting these markets have also in-migration from new residents. “Geographic locations you wouldn’t think were good in areas to invest in are now the places to go.”