As we enter 2025, the commercial real estate (CRE) market is on the cusp of significant shifts, many of which will trickle down to affect smaller real estate investors. While larger CRE markets often serve as a lagging indicator of broader economic trends, the growing concerns over loan maturities and mortgage delinquencies carry valuable lessons and potential opportunities for individual property owners and aspiring investors.
The CRE landscape: A snapshot
The broader CRE market deals with the consequences of “extend and pretend,” where lenders delay addressing problematic loans to provide borrowers with breathing room. However, rising interest rates and declining asset values, particularly with property types like office, hospitality, and retail, have created what some analysts predict will be a higher level of lender-driven listings and sales. Understanding this dynamic is essential for smaller investors, as distressed sales could influence local property values and financing conditions.
Key takeaways for smaller investors
While the CRE market focuses on institutional-scale assets, smaller investors can gain valuable lessons and opportunities from these trends:
Rising loan delinquencies and maturities
Smaller investors may encounter similar challenges as larger CRE owners face pressure to refinance or sell assets. Loans issued during low-interest rate periods, particularly between 2020 and 2021, are maturing under tighter credit conditions. Investors should proactively evaluate their loan terms and consider refinancing options or additional equity infusions.
Distressed sales in submarkets
Distressed opportunities in sectors like Class B-D multifamily, suburban office spaces, and limited-service hotels will emerge in markets like Atlanta, Dallas, and Phoenix. Even if these aren’t directly in your investment portfolio, local market distress can impact your local economy. It can provide buying opportunities or signal caution if you hold properties in these areas.
Shift in valuation metrics
Many properties purchased at peak valuations may struggle to refinance without significant equity injections. You might see opportunities to acquire assets at lower valuations as a smaller investor. However, thorough due diligence is crucial to avoid overpaying in a declining market.
Strategies for smaller investors
Focus on cash flow: Cash flow becomes king in uncertain markets, and it's often harder to quantify for smaller investors. Prioritize properties with stable tenants and predictable income streams over speculative value appreciation.
Understand financing options: Stay informed about lending conditions and explore creative financing solutions, such as partnerships or seller-financing arrangements.
Monitor local market trends: Markets experiencing high transaction volumes during peak valuation periods may suffer more. Stay updated on property performance in your target area.
Broader impact on your wealth
Real estate investment is not just about individual properties; it’s a critical component of personal wealth-building. The lessons from the CRE market remind smaller investors to maintain diversification, focus on risk management, and ensure alignment between investment strategies and financial goals.
Looking ahead: Opportunities in 2025 and 2026
While distress can be unsettling, it also creates opportunities for those prepared to act. Smaller investors who focus on fundamentals, remain patient, and conduct diligent market research may find 2025 an excellent time to expand their portfolios under more favorable pricing conditions.
Final thoughts
The challenges and opportunities within the larger CRE market offer a roadmap for individual investors. By staying informed and disciplined, smaller investors can navigate potential market disruptions and align their strategies with long-term financial goals.
About the author/planner/teacher
As the Founder and CEO of The Real Estate Whisperer™ Financial Planning, Rich Arzaga, CFP®, CCIM, is a flat-fee financial advisor who provides advice only. By focusing solely on delivering client-centered financial advice rather than managing investments, he ensures his undivided attention to his clients' needs.
Drawing on his extensive expertise, Rich provides valuable advice on various real estate topics, including buy-sell-hold strategies, tax-deferred and highly appreciated tax reduction strategies, real estate succession planning, and rental property cash flow analysis.
His exceptional knowledge and real estate strategies have earned him recognition in business and finance publications such as the Wall Street Journal, The New York Times, Newsweek, Kiplinger, and The Journal of Financial Planning. As an esteemed adjunct professor at UC Berkeley Personal Financial Planning programs, Rich has been Honored for his excellence in teaching.
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