What Changed (And What Didn't) in CRE?

Episode Transcript:  

  unbelievable things have happened in the last 12 months. Many of them that people did not predict and really had no way of being able to foresee. But here we are. So today we are going to actually have a throwback look from one of our previous guests that's joining us again a year later today. To see what have we learned about all that's happened and what do we do moving forward when it comes to real estate?

Let's get REady2Scale.

Hey guys. I'm Jeanette Friedrich, a director of Investor Relations at Blue Lake Capital, and joining me yet again today is Paul Fiorella. Paul is the director of US Research for Yardi Matrix, as well as a volunteer editor in chief of Crecy, which is commercial real estate. Finance council. Prior to that, he was the VP of research for Prudential Real Estate, and earlier on in his career, he was the managing editor of Commercial Mortgage Alert.

He has a BA from Messiah University and he is joining us today, again from New York. So Paul, welcome to the show. 

Thank you Jeanette. 

It's great to be here. Yeah, we're happy to have you back. So thank you so much for making an appearance yet again. Now I'm excited to talk to you because we had a really interesting conversation a year ago, and here we are recording today on June 16th, 2025, and a lot has happened in just 12 months.

So last July, you actually described yourself as being fairly bullish despite the rising rates. That we were looking at. Now here we are nearly a year later, and at this point hire for longer is pretty much entrenched in the market, and I think a lot of people are beginning to resign themself to that fact.

So I'm just curious, how has your overall risk stance shifted, given that, and why? 

I would say that characterizing my views along a bullish bearish spectrum is a lot more fluid than it was last year, right? I'm still not bearish, but my optimism has been tempered a bit due to the growing uncertainty in the economy and around the globe.

So let me answer the question in two parts, right? Property fundamentals and capital markets. On the fundamental side, I would say there's an increasing number of risks to the downside. We're coming off several years of very strong multifamily demand. 2021 was a record year Matrix data shows that about 750,000 apartment units were absorbed nationally.

Highest we've recorded for decades. Demand was strong in 22 and 23, and in 24 was another banner year, about 550,000 units absorbed. So that's coming into 2025. Things are going really well. And what's driving so much demand? There's a bunch of things. Some of the major ones are, a, the week for sale market.

The gap between owning and renting is at or near all time highs due to high mortgage rates and property values. So that's keeping many renters in place who otherwise might have become first time homeowners. So there's a lot of stickiness. And retention rates. Strong job growth. So the last four years, the economy created about 3 million jobs per year.

And when people have income and feel confident enough to form new households, rather than living with family or roommates they go out on their own. Work from home. People wanted more space for home offices and they were able to migrate to suburbs and secondary and tertiary metros.



Immigration was a big driver in the last couple of years. The government said the US added 3 million immigrants per year, both legal and undocumented. And whenever you think of that from a political point of view, it creates demand for housing debt. Helped multifamily filled multifamily units.

And then social factors such as delayed marriage and child rearing. Now some of these factors are still in place, the for sale market. Social trends haven't changed all that much and, but we do expect job growth to weaken due to the uncertainty around policy and tariffs that's frozen.

Many companies employment growth at tech firms are beginning, tech firms are beginning to shed some of their excess employment. 



And, the federal government, firing workers and ending grants and contracts with medical, scientific research, universities, that sort of thing.

Unemployment isn't going to skyrocket but the odds are good. That growth is gonna be slower now than it was in the last few years. So another demand factor is immigration. Not just, service industry workers and farm hands, but fewer foreign students and skilled laborers. People stop coming into the country and others are removed.

That's gonna slow down demand for apartments. Some argue that immigrants aren't renting institutional quality. Properties and apartments. And that doesn't, so that won't affect the part of the market that we cover. And there's some truth to that, but there is a filtering effect that will, again, weaken demand.

Work from home is under attack as companies push workers back to the office. So the bottom line in all this is that, in my view, demand is likely to. Go from strong to maybe more described as moderately positive at a time when deliveries remain high remain high. And that's a recipe for weaker growth.

Again, it's not bearish. I'm not predicting a big downturn, but at the same time I think demand's gonna weaken. Now when we look at the capital markets part of the equation, right? People expected. That a year ago, the consensus view was that interest rates were gonna slowly diminish in over the fall of 24 and throughout 25, and we'd have every other month, there'd be like a 25 basis point cut in the interest rate, and that would bring rates down and would help to, create more property sales and it would ease the refinancing situation. So properties that have high rate low rate mortgages that were originated before rates went up in 22, that would ease the, the underwater, being underwater because, trying to refinance a 3% mortgage at 6% you qualify for fewer proceeds now because of.

What has happened in the meantime? The. Interest rates aren't going down right. The Federal Reserve is worried about inflation, inflationary tariffs. They're also worried about uncertainty in the economy, so they're sitting on their hands and at the same time, foreign in, or investors in general.

A lot of foreign investors are no longer buying treasuries at the rate they did before, so that even though there's a forecast for slower growth. Interest rates are remaining high and that's a problem as well, that you know that US is less and less being seen as a safe haven and there's so much uncertainty that, rates aren't gonna go down like they were expected to.

So again, the bottom line on that is that instead of there being. Lower financing costs that unlock a lot of deals that were sitting on hold for a couple years while people were waiting for sellers in particular waiting for rates to go down. Now there's still a lot of uncertainty. There's a lot of capital to buy properties, but I think in a lot of cases, sellers are just waiting because they still think rates are gonna go down and so they're not.

Selling until they see prices go up. And right now you also have a dynamic where rates are relative to mortgage rates are still, five, five and a half, 6%, but cap rates, acquisition yields are still either negative or pretty flat to, the cost of financing. So that means.

Buyers that have access to cheap financing, like REITs or, big funds have an advantage because they can buy in lower cap rates than than other types of buyers who are not so well capitalized. The bottom line is that I think that the for sale market is going to stay weak for another.

Another few quarters. I'm not, I'm not saying it's going to decline dramatically, but over the last, we had $220 million of multifamily sales volume in 2021, and the last couple years it's been about 60, 70 billion. And we are probably gonna be in that range again this year. But then the last part of that would be the refinancing, right?

A lot of borrowers, a lot of loans have been extended over the last couple years thinking that they'll get some relief when rates go down and the math makes more sense to refinance. But as the 10 year treasury remains pretty high, close to four and a half percent, and I don't mean high by historical levels, but high relative to where they were a few years ago.

When the original loans were originated then. I think banks are increasingly looking to resolve those loans and not extend them anymore. So we're seeing a lot of one-off negotiations with banks and CMBS trust and special servicers. It's it's not. It's not like a crisis level, like it wasn't the GFC where, even though the, there are more loan delinquencies, you'll get the CMBS, the multifamily delinquency rates, some like six point a half percent somewhere in that area.

But Fannie and Freddie are still less than 1%. The bank multifamily, delinquency rate commercial banks are about 1.3% and that's an increase over where it was, but it's still fairly low. So I, there's going to be a lot of loan restructurings, there's a lot of capital out there looking to work on, to, to provide, mezzanine equity sorry, mezzanine debt and preferred equity to repair these kind of broken loans.

But it's not gonna be. A lot of banks going under or not, billion dollar loan sales and these kind of things, it's gonna be more quiet. 

Yeah, I couldn't agree more. And I've been watching it happen in re in real time from the sponsors point of view and being in communication with a number of other sponsors.

Indeed that's very accurate. 

Now from, I've spoken to a, a distressed debt buyer the other day, and she said. They're talking a lot to banks. But banks are looking for Par and they're saying they were expecting to be able to buy loans at a big discount. 



But that's just not the case.

There might be a slight discount, but the loans are not in. I. Where even where the borrower's having trouble, the severity of the loan, the loss severity, the, it's not so badly underwater that banks are selling them at a steep discount yeah. I think that's, it gets back to what I was saying, there's a lot of capital out there looking to repair these deals, looking to provide equity.

And it's not as bad as a lot of people were expecting. 

True. I think also what has helped the situation, help in being a loosely used term was also just the overvaluation of multifamily properties during the time that a lot of these loans were structured. Even with the significant loss of valuation, because of the increase that we've had in cap rates.

Throughout the market, there's still tremendous value to the literal real asset, right? The real estate. And I think that has also been a favorable hedge for many investors that have found themself in this challenging position, but focusing more on not just the challenges in the negative I would say.

Obstacle courses, right? That a lot of sponsors are currently having to navigate their way through with their current portfolio. How do you view risk from an opportunity standpoint for those deals that are distressed and coming to market? There's not been a lot of them, obviously, and I think a lot of people were hoping and waiting much as you said to be able to find these fire cells that really have not begun to materialize.

But nonetheless, the reality is that at least in my opinion, it appears there's definitely been some correction within the valuations of multifamily properties in the market. Do you view that in the same light, and do you believe that helps to, in any way reduce the risk of being able to identify new current investment opportunities that are very favorable to investors?

I don't think there's any doubt that lenders would like to. Clear their balance sheets of these loans that have been sitting on their books for too long. Banks, for example, they don't really wanna deal with it, first of all. And secondly, they want to get, their capital back so they can make new loans.



And again, there's hundreds of billions, hundreds of millions of dollars of. These kind of loans that are sitting on, bank balance sheets. I guess there's billions of dollars of loans that are on, lender balance sheets that will be, repaired or will be resolved sometime in the next, 12 to 18 months.

So in that sense, I think there, there will be a lot of opportunities. Even another area might be. Like the collateralized loan obligations the, the CLOs, which originated for the most part, a lot of short term loans that are already come due. Though the loans that originated in 2021 are already being extended or near the end of their extension periods.

And CLO issuers that. The issuers of these kind of structured securitized vehicles that are pools of short term loans. The issuers of these trusts have. Started to buy back, or they've been buying back some of the loans that need to be restructured. They're buying them out of the pool because they don't want the trust to take a loss because that would hurt their future business.

So they're buying the loans and just, on a one-off basis, quietly negotiating with rescue capital. So there's, that's just, that's another avenue of sourcing for. Distress deals. 

Interesting. True. All right. Now you flagged the Sunbelt market as being, heavily oversupplied and essentially that oversupply being the key drag on multifamily rent growth.

Last year when we spoke now in 2025, we've. Seen an incredible rate of absorption of that supply that came into the market, and permits now for the remainder of 2025 have really dropped off very sharply. So given that. I'm curious to know, how you would forecast rent growth now moving into the second half of 2025 and into 2026, do you think that the, that forecast has essentially improved from where we were last year?

Or do you believe that absorption risk are still really elevated in the market? I. 

Yeah, that's a great question and that's what everybody wants to know. Everywhere I go, that's like the number one question that everybody has. Let's get down to it. There's the national picture, but there's a great deal of variation on the regional level.

Like before I was talking about, demand has been good and it's been good most everywhere. Even, in the markets that it's really high in the Sunbelt. But it's also strong in the Northeast and the Midwest. There are certain markets that aren't great, but if you look at it regionally, there aren't any places where there's no, where.

Demand has not been strong over the last few years. Sun melt markets continue to have very strong demand, but supply growth is really high. The advertised rents have been asking, rents have been negative in markets like Austin, Phoenix, Nashville, Orlando, Dallas, Atlanta, Denver, and so on. Austin, for example, the average advertised rent has dropped more than $200 since the peak in 2022.

Wow. And now it's down to 1550 some 1554 according to our matrix's most recent monthly numbers. And supply growth has been high in recent years, but starts are slowing sharply. We came off of long-term high of about 650,000 units delivered last year. 

But 

starts have dropped from an average of about 700,000 units in 2022 and 2023.

If you combine those years to just over 400,000 units in 2024, and. Now when, again, when I say that it's not spread evenly across the country, we're still seeing six to 8% annual growth in markets such as Austin, Phoenix, Nashville, Charlotte, Orlando markets where rent growth has been negative, and those markets have a lot of new properties that are, leasing up much more slowly and than anticipated.

So the. Question is how much are delivery is going to slow. 



And when will we see rent growth again in those markets? And a lot of the narrative in the industry that over the last, six to nine months is that, deliveries are dropping so fast that rent growth will be back this year.

And we're gonna get really strong, booming rent growth again, 26, 27. 



And that could be, but that to me is an optimistic scenario. There's a couple of reasons I say that. For one thing, our latest forecast has 536,000 units delivered nationally this year in 2025.

And while deliveries are slowing, there's still going to be another, five to 7% in some of these. High supply markets over the next couple of years. So the supply is going down nationally, but maybe not as quickly as, people might expect, and especially not as quickly in some of the markets that have or already oversupplied and have a lot of lease up.

E empty lease up properties over the last couple of years. And then there's the question of whether demand will weaken, which I, talked about wrote before. The optimistic scenario relies on everything going right, which could happen. But I think that the base case is that Sunbelt rents stay weak for the rest of this year.

And I think it's gonna take their, the recovery. The optimistic scenario would be we're gonna start seeing rent growth maybe late this year and pick up moderate growth next year. But I think we're gonna still be weak headed into the middle of next year and. I don't, I think we'll see moderate rent growth then coming, say like second half of 26 and into 27.

But I, I don't think it's gonna be as robust as I might've or what, a lot of the consensus in the market was expecting. A few months ago. 

And some important takeaways there for our listeners. And I think that 

other people, and I think other people on the market, I was on a call, one of the multifamily trade groups the other day, and I could just, you could tell that people on the call were saying.

We're revising our outlook to be a little bit more, a little bit more, less positive than we, we would've thought at the beginning of the year,

yeah, no, for sure. And as I was saying, I think for our listeners, one of the most important takeaways that you can get from this conversation and this type of, data is, when you're looking at.

A potential new deal and you're looking at the proforma it would what I'm hearing, Paul, is that it would be wise to err on the side of caution and look for either flat or very moderate, very mild rent growth. As opposed to having the expectation of rinse growing, 3% year over year.

We all wish, but that it's not very likely in the cards or if it is wonderful, but make sure the deal can pencil without that.

Exactly. And and the funny thing is that with, in multifamily that, cap rates are still very tight. 



And if you are a, very well, like a REIT or super well capitalized company, they're, they was, they're buying properties at, four and a half, five cap rates.

They can do that because they have tree cost of financing and they're expecting rent growth over the next couple of years. But if you're not a REIT or somebody that has, a billion dollar, credit line or something like that, you really have to be cautious about being aggressive in this scenario, because, over and over again, you look at the last few decades.

The, what has created, a lot of problems, buying with proforma rent growth, buying, with overly optimistic assumptions and so on. Yeah, definitely. That's very good. Good advice. 

Yes. And I think also just from a sponsor standpoint or a GP standpoint I think this is also really pertinent data so that you can plan accordingly to focus more heavily.

At least what we have seen in our portfolio is we are getting better. Premiums from renewals than we are even new leases and really having a hyper focus on driving renewals at the property. In addition to being creative and finding other ancillary income streams for the property besides just that reliance on rental growth.

So from a sponsor standpoint, I think that those, this type of data is also really important to understand how to adjust. Moving forward in the business plan when the circumstances have proved themselves to be very sticky or stagnant from where we were last year to where we are today, almost essentially in the same spot.

Yeah. And that's, our data's showing that. Exactly right? Matrix the latest monthly data the renewal rents nationally were up about 3%, 3.2% nationally, and most, almost all of our top 30 markets had positive, strong renewal rates. Meanwhile, the asking or advertised rents. Have been pretty flat over the last, almost year and a half now, at just under 1%, or right about 1% for the last 18 months.

So renewal rents have outperformed, asking rents for, a long time and that probably will continue. 

Yes, very much interesting. All right. Now it's been quite a weekend. There is certainly a heightened conflict between Israel and Iran as well as a number of other, geopolitical.

Factors that are playing into global markets and here in the US we've also had a tremendous amount of disruption with everything from the activities happening here in Los Angeles where I am today. In addition to, nationwide protests and everything else in between. I'm curious to know, last year you had said that USG geopolitical retrenchment could really hurt real estate even more than tax changes.

So given everything that's happened in this last year, what would you say has been maybe a single global flashpoint today that would most quickly force you to revise your underwriting assumptions and take a different look at things? 

Oh, you really wanna get me in trouble here? What I was saying last year about tax, I don't think they were gonna see big changes in the taxes.

And I think if you see that the tax bill pretty much kept in place all of the favorable tax circumstances, all the favorable, tax rules that apply to commercial real estate. There are some proposals in the. Budget the president's budget proposal to reduce Section eight and home renter subsidies, that would be devastating to owners of properties that rely on those programs.

But that's still up in the air, that's a proposal. The budget's not, the budget's going to be months away after the tax bill. And so I don't know. That's a, that's something for the second half of the year I. But, when I was talking about, geo geopolitical retrenchment it's basically that my, observation for the, the 30 years I've been in this industry, that downturns tend to be caused by exogenous events, right?

Not from within the industry. Not to say that the industry hasn't done things that have been, caused itself harm, but. But typically the flashpoint tends to be an exogenous event. Going back to the 1998 Russian bond crisis, or the Russian bond default and nine 11, the GFC, COVID-19.

None of those things were directly started by commercial real estate. Now commercial re real estate, to the extent that created a crash in commercial real estate, it was because. The industry was per behaving, much more aggressively in doing things like, over, aggressive underwriting and so on.

But. We're at another one of these times. And, I can't predict specifically an event that I'm not, I can't really talk. I'm not a foreign affairs analyst to talk about the details of the war. At least not, not professionally, but there is a huge amount of change.

This administration is intentionally, overturning the world order. America's been the global leader in finance, defense, since World War II and I. This administration doesn't wanna do that anymore. Global trade is being restructured. So one of the big risks that everybody knows is, talking about tariffs, the, the stated goal is to bring manufacturing back to the us.

But I see a lot of downsides to this, right? One is that, tariffs or attacks, history shows it's going to increase prices and inflation. That's not a good thing. Another is that, talking about bringing manufacturing back to the United States, it takes years to build manufacturing plates.

You just don't flip a switch and build manufacturing. Plants, in the meantime, as we shut ourselves off or create, higher tariffs and reduce trade with the rest of the world, what does that do in the meantime? I, we're still not close to seeing the effects of the tariff policies.

It is not gonna kick in till at least a second half or the, the fourth quarter. Just the beginning of it. And then, it's also worth questioning in my view, why we wanna bring back manufacturing. America is the world's most prosperous nation. We have 4% of the global population, about 27% of global GDP.

And a lot of that wealth has been created by the fact that we've, turned away from manufacturing as our main, industry toward services and intellectual property. Segments such as technology, medicine, science, financial services, I doubt many people with small children, dream their kids work grow up and work in a factory, right?

Yeah. How many Americans want low wage factory jobs? 

You 

know, and that's, that's one of the reasons why. Having immigrants come in was necessary because we don't have a, Americans that wanna do construction and, farm, farm work and, service industry jobs and, if plus, you look at manufacturing, a lot of manufacturing has been automated.

So even though we bring back manufacturing, how many jobs does that create? I don't know. And finally, if the goal was really to bring back manufacturing, we're actually, canceling funding in some of the bills that were passed in the last few years that had created, the construction, manufacturing of batteries, solar panels and things like that.

There was an article in the New York Times today about how, the reduction of, or how eliminating subsidies to build battery factories. Is cancel causing the cancellation in some of those products. I don't know, there's risks. So anyway, it's just a, long way to say, I think there's risks to the, the tariff and the policies that we're implement implementing on that front.

Another shift is that, the, with the US is withdrawing from its role as a global leader and that forces. Countries to do less business with the us we're abandoning soft power in places like Africa and Latin America. We're alienating, former allies in Europe and NATO and that opens up the door for those countries to develop supply chains that cut out the US in favor of China.

Now. The US is too big and too important to the global economy to, completely lose. Its role, long term there's going to be impact and, to all these things. And, I think there are risks that, a lot of those impacts will be negative. And, you were talking about, wars, right?

We have wars in Europe, we have war in the Middle East, and those right now there's not anything that is happening that would, create the large scale kind of exaggerated event like we were talking about. But it could easily, could spiral outta hand, right? We're, there's there's no.

It's too soon to be, confident to say, oh, that's just not gonna affect us at all. The war when it started, the war in Ukraine when it started a few years ago, impacted food prices and now, we have potential impact on energy production and things like that.

Exogenous events don't trigger they don't. Trigger downturns in and of themself. And but when commercial real estate becomes aggressive, it becomes vulnerable to things that happen. And so that's, I get it back. To get back to what we were saying, that's, I think now is a good time to be, very conservative and mindful of things that could go wrong.

And I was gonna say along those lines when, if someone is simply just trying to grow their retirement fund, keep their head down, stick to their investment strategies and all of this, noise and activity is happening all around them, what is your advice when it comes to, when they're evaluating someone's underwriting or.

Or something else along those lines, for them to just simply remain focused on to allow those that are focused on trying to achieve their goals. To do so even in the middle of what feels like mayhem. 

Yeah. I think you want to focus on operators that show that they can handle, they've had a, they've had a record, they have the financial wherewithal to.

Handle things that go wrong. Because I think, when you look at the defaults in recent years, a big part of it is, syndicators that, that don't have the capital. So when interest rates went up and banks said, all right, your loan is now under. Operators that didn't have, or managers that didn't have the wherewithal to say, all right, I'm gonna negotiate with the bank and I'll put up some extra reserves, or maybe I'll pay down the balance or something.

That's where we started to see delinquencies. And so you want somebody that has the ability to handle things that go wrong. You want somebody that hasn't. Doesn't assume, that this investment's only gonna work if things get better over the next couple of years.

That's, yeah. You want somebody with a good track record, somebody that can handle. Adverse events. 

Yeah, definitely. Understood. All right. Paul, thank you so much for taking some time to walk down a memory lane with us from last year and take a look at what's ahead, of us, most likely that any of us can try to even predict or draw conclusions from, current data.

But I think the encouraging thing is, we've made it to where we are today from where we were last year, and. We'll do it again next year, so we'll just continue to march on here. But thank you so much for coming on the show. I would take you through the lightning round questions, but of course, you've already done them with us when you joined us last time.

So for this show, I'll just simply say thank you for coming on again, and I wish you well. 

Hey, thanks. It's great talking to you and look forward to seeing you again. 

Likewise. And for those of you that invested your time with us today, I hope you found this interview helpful and very informative. I know I certainly did.

I. Please don't forget to leave us some comments if you're watching along on our YouTube channel, and let us know more that you'd like to learn about or leave us a review on whatever podcast provider you are streaming from today and share your thoughts. Thanks so much and we'll see you guys on the next episode.

I. Ready to Scale is brought to you by Blue Lake Capital, where we hunt down the best multifamily investment opportunities that we can find and invite investors to join in with us. We target class B value add multifamily properties across the Sunbelt. Our CEO Ellie Perlman, invest a substantial amount of capital into every deal.