As the year wraps up, I want to thank you for being part of the CrowdStreet investor community. It was a challenging year for commercial real estate, marked by illiquid capital markets, low transaction volume, and high interest rates - all of which combined to exert downward pressure on asset values.
While more challenges may lie ahead, we have implemented improved processes and believe we have the right people to navigate the new year to help identify new, attractive opportunities. We are entering 2024 with new leadership, a stable financial position, and a more efficient organization that understands the unique needs of today’s market. Together, we are showing up with a renewed commitment to providing our investors with a high level of service.
We are introducing several initiatives that stand to improve your experience going forward:
- Offering capital call overviews to affected investors whenever possible, highlighting important considerations and information provided by the sponsor related to the capital requested.
- Working to enhance deal and portfolio reporting to provide investors with more insight into the deals in their portfolios.
- Proactively monitoring active deals to mitigate potential issues and keep investors informed by striving to ensure each investment receives its due attention.
- Challenging sponsors who are not meeting investor expectations, and expressing our concerns more openly about the areas where they need to improve.
As we assess new deal flow, our Capital Markets team is focused on providing a range of quality, well-vetted investment opportunities that align with investor objectives and our investment thesis. We are currently taking a strict approach, resulting in a limited number of offerings on our Marketplace. However, as lenders exert more pressure on owners to liquidate assets at market-clearing prices, transaction volume should gradually increase, generally resulting in more opportunities that align with our criteria. Until then, we will continue to patiently apply our current thesis and lean in when we see more opportunities that check more boxes that are in line with our criteria.
With the Fed's latest guidance on December 13th, 2023, market consensus is that short-term interest rates likely peaked in July '23, with three 25 basis point rate cuts expected next year.1 Although this news may help spark the beginning of a recovery, it's unrealistic to expect the first rate cut to reinvigorate the commercial real estate market fully.
Owners of some real estate properties will need to reconcile that their capital structure may not be sustainable in a high interest rate environment. Based on a survey conducted by the Mortgage Bankers Association, approximately $728 billion of commercial mortgages matured throughout 2023, much of which will still need time to reconfigure, and another $659 billion is on tap to mature in 2024 - this makes up roughly 31% of all outstanding mortgages.2 We anticipate that even with potential expected rate cuts, there may still not be enough debt capital immediately available to meet upcoming refinancing requirements.
Given the market's current challenges, including the restructuring of capital, upcoming debt maturities, and rate cap expirations, we're expecting sponsors to request further capital infusions or capital calls. It may be important for investors to consider viewing each opportunity as a new investment when confronted with these capital call scenarios. By weighing it against other available investment opportunities without the expectation to redeem past equity in that deal, it can be helpful to ask yourself, “What criteria would a brand new investor to the deal consider?” To learn more, we invite you to read our ongoing series of content on capital calls.
We expect that 2024 will be largely centered around the repricing of asset values for new transactions. Transaction volume may gradually increase as sellers begin to capitulate and transact at values that establish market clearing discounts to pre-Fed tightening levels. And if buyers secure market clearing discounts in a capital markets environment that is beginning to see interest rate relief, we believe there is a good probability that it will transition us into a cycle of gradual recovery, which may set the stage for asset appreciation.
We hope to reinforce CrowdStreet as your commercial real estate partner of choice in 2024 and eagerly anticipate a year of growth, collaboration, and shared success with you.
Wishing you a happy holiday season and a prosperous New Year.