State of CRE with Kris Mikkelsen, EVP of Investment Sales, Aaron Appel, SMD of Capital Markets, and Ivy Zelman, EVP of Research & Securities

Willy welcomes Kris Mikkelsen, Ivy Zelman, and Aaron Appel. Kris Mikkelsen is the Executive Vice President of Walker & Dunlop Investment Sales and is responsible for the origination and execution of investment sales and equity capital raise for multifamily assets focusing on the Southeastern markets. Ivy Zelman is the Executive Vice President of Walker & Dunlop Research and Securities. She is also the CEO of Zelman & Associates, a leading housing research and investment banking firm acquired by Walker & Dunlop in 2021. Aaron Appel is the Senior Managing Director of Capital Markets at Walker & Dunlop. He focuses on sourcing and structuring financing for all commercial real estate asset classes nationally. The episode starts with Ivy stating that the overall underwriting has significantly changed in terms of stringency and more conservative rent assumptions due to the uncertainty of capital cost. Kris explains that negative sentiment shows across the board because of the low supply index. A hawkish stance remains unless employment figures hike up. According to Aaron, core and value-add multifamily assets have liquidity but cost more. Less is needed to pay for the asset if borrowing costs increase substantially. Talking about his recent bridge loan, Aaron mentioned a good spread for the lender in loan value versus loan amount. Ivy adds that overall rent growth is holding up at levels of renewal basis; however, renewals will be stickier. Her forecast for rent growth is above 4.5% and moderation to 2%. The data is much more optimistic compared to new move-in rates. She also describes how more competition, such as in the supply from build-for-rent (BFR) operators or investors selling single-family rentals (SFR), is expected in 2023 and puts more pressure on decelerating rents. Affordability is also a factor for for-sale builders to turn to the rental market and sell units on a scattered basis. Although there are many construction loans in the market right now, Aaron believes getting them capitalized is challenging. He predicts a decrease in leverage of 10-15% and an increase in the cost of funds by 500 basis points. Inflation is a huge factor in the disinterest in these loans. Kris shares how this makes it difficult to predict numbers and adds that able-to sellers are currently clearing the market. Instead of finding buyers and committing to six-month deals, merchants now have to de-risk the rent roll. He also explains how they are currently transacting exclusively with closed-end vehicles not subject to quarterly markets or operating with separate account capital. He says that keeping sale activity to create liquidity and fund redemptions is the responsible thing to do. Aaron chimes in about how commercial real estate is a fantastic hedge against inflation, but with the swiftness of rate increases, it will undergo a reevaluation period of assets. When it comes to inflation, “the smaller the builder, the less likely they’ll see relief,” Ivy says.

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