Addressing Headlines: Distress in Commercial Real Estate

Explore the contrasting distress in the office vs. multifamily markets.

Summary

Joseph Penner, CEO of HSR, and Paul Perkins, the company's CIO, address concerns raised by recent negative headlines about commercial real estate. They emphasize that these headlines do not reflect the entire sector, as each asset class faces distinct challenges, particularly noting differences between the office and multifamily markets.

Perkins noted that the office market is struggling due to rising interest rates and the persistent shift toward the work-from-home culture, which has led to prolonged vacancies and downward pressure on rental prices. In contrast, the multifamily sector, HSR’s primary focus, continues to demonstrate strong fundamentals. Despite rising expenses, multifamily properties in HSR’s target areas have maintained high occupancy rates, around 95%, signaling healthy performance and manageable operational conditions.

Penner points out that the distress observed in the multifamily sector is often linked to difficulties in restructuring their capital structures rather than operational issues seen in the office market. Perkins further elaborates on economic factors affecting real estate, particularly the recent rapid increase in interest rates, which has led to lower-than-expected property valuations for projects initiated during 2020 and 2021, despite strong leasing activity. This valuation challenge is primarily due to a significant devaluation of properties' Net Operating Income.

View the full interview with CIO Paul Perkins here.