Follow the Money: Navigating Real Estate Capital Markets in Uncertain Times

As the country continues to recover from the pandemic, the real estate industry is still navigating its own set of obstacles. These include rising inflation, rising interest rates, and legislative changes. As economic uncertainty applies pressure to traditional sources of real estate capital, the industry is turning to private capital and continued reliance on small and regional banks.

Reliance on small and regional banks as real estate lenders

Despite the pressure rising interest rates and inflation have put on small and regional banks, these institutions continue to be a significant source of capital for real estate. According to CBRE’s Q4 2023 Lending Momentum Index, banks remain the top non-agency lending group, accounting for 39.5% of fourth-quarter loan volume. The degree of investment from small and regional banks has grown steadily over the last few years and is expected to continue as the rate of investment has tripled over the last decade. Small and regional bank investment has proven most significant for hotel and retail real estate.

Reduced real estate funding from government programs

Following the pandemic, real estate funding programs like commercial property-assessed clean energy financing and the Inflation Reduction Act provided government-backed capital options to residential and commercial real estate developers and property owners. However, these programs require adherence to stringent regulations, such as clean energy and sustainability regulations, which precludes many real estate companies from obtaining this type of capital. While the government has historically provided real estate funding with loans, subsidies, and tax breaks, a more fiscally restrictive House of Representatives could reduce government funding as a source of capital for real estate. The expiration of legislation like the Employee Retention Credit and regional multifamily housing grants in 2023, along with ongoing changes to fiscal policies, further points to decreased government funding influence in the real estate sector.

Private real estate funds are gaining momentum

As economic uncertainty continues to impact the real estate market, risk-averse investors are scaling back on their investments. This shift is driving down valuations and creating opportunities for high-net-worth individuals with a higher tolerance for risk. These individuals have significant capital that allows them to take advantage of reduced values, giving the potential for a much higher payoff when the market rebounds.

Private real estate funds are also a significant source of capital that has been seeing significant growth over the past few years. This growth could be in response to higher potential returns on investments, as well as a reaction to traditional lenders decreasing loan-to-value ratios.

A path forward for real estate funding

Today’s uncertain economic landscape requires real estate firms to take a creative, flexible approach to identifying capital sources and securing the financing they need to grow. Real estate companies are more likely to explore private capital and continue to look to small and regional banks as sources of funding, even with rising interest rates and inflation.

As investors adjust their strategies and portfolios in response to the current times, the industry will need to navigate the financial implications of these changes. To succeed in this economy, industry leaders should rethink sources of available capital and consider that sources may differ from those of the past. 

To learn more about our Real Estate services, which include Cost Segregation, Opportunity Zones, Tax Services, and Legacy Planning, reach out to Perkins today.


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