2024 Fall Issue of Urban Land - 86

as vacancy rates continue to rise and
rent growth is flat to negative. Multifamily
vacancy rates have risen significantly over
the past year. In such markets as Atlanta,
Austin, Dallas, and Nashville, multifamily
vacancies have reached levels not encountered
since 2009. A large share of these
vacancies is occurring in luxury and highend
units, which translates into declines in
rent, net operating income, and property
value, which in turn is leading to refinancing
issues.
Thren again, retail commercial real
estate remains healthy, with suburban
properties outperforming their central
business district counterparts. Some
recent softness occurred in industrial
commercial real estate, particularly as
more warehouse/distribution space enters
the market. However, industrial vacancies
are coming off all-time lows in several
markets, so some added vacancy is causing
rent growth to moderate versus the
double-digit levels experienced in 2023.
For added analytics and insights into
commercial real estate, the Atlanta Fed's
Commercial Real Estate Market Index
assists the public in tracking and understanding
those conditions in more than
350 markets.
Pricing YOY Change
Uncertain commercial real estate
asset values
Asset values have been influenced by
a combination of higher interest rates,
growing expenses, and declining revenues.
This mix led to reduced transaction
volume, which can have implications for
accuracy in valuations.
Asset values, in general, have been in a
state of flux since the start of the decade.
The onset of the pandemic put pressure
on retail and hotel property values. Then,
with pandemic support payments underpinning
economic growth, price growth
accelerated. Beginning with the office
sector in late 2021, asset pricing started to
weaken and eventually declined in 2022.
As of mid-2024, asset pricing trends
appear to be reversing, as the rate of
decline is lessening.
Note that the trends discussed here
are general in nature. Value is locationand
property-specific. Circumstances exist
wherein a significant deterioration in value
has occurred. In some cases, value is off
by 50 percent or more.
Also, gauging value is challenging. In
one instance, three large brokerage companies
valued the same office building for
a lender over a span of three weeks. Their
opinions of value ranged from $8 million
to $32 million. Owners and lenders make
decisions amid such a wide range of value
only with great difficulty.
The highest and best use of some
office properties-as driven, in part, by
changing use in the office sector-is to
raze the sites and turn them into vacant
land. Asset values are also being affected
by changes in the availability of finance.
Financing
Financing is among the most challenging
areas of commercial real estate today.
Issues driven by higher debt costs and
declining values continue to have profound
implications for the sector. With
the Great Financial Crisis in the rear-view
mirror, commercial real estate lenders
have been generally more conservative
with their underwriting and loan risk
profiles. This caution has put them in a
better position to deal with industry volatility
and uncertainty linked to changing
economic conditions. Compared to their
footing in the Great Financial Crisis, lenders
are better capitalized now and have
improved their capabilities in commercial
real estate.
However, the wide disparity among
declines in value have put many lenders
in the unusual position of having to deal
with loans that carry an atypical higher
amount of risk. This risk materialized not
only from the current, more normalized
rate environment but also stems from
higher operating expenses, less affordable
multifamily rents, and greater space efficiency
in the office sector.
Lenders must navigate a myriad of situations
in today's changing environment-
whether the loan is current or new; and
whether the borrower is in good standing,
among others. These factors, alongside
many others, will influence the refinancing
of the sizable number of commercial real
estate loan maturities.
Lenders' responses to the downturn in
Source: MSCI-RCA
86
value and to added loan risk have varied
widely. Part of their response has been
dictated by the borrower's standing. If
the borrower is fulfilling obligations, lenders
are working with them. A primary
strategy is to adjust the loan maturity in
URBAN LAND
FALL 202 4
2024 Fall Issue of Urban Land

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