Navigating the Turbulent Commercial Real Estate Finance Space

Strategic Insights -

The commercial real estate finance market is experiencing a mix of economic, market, and policy shifts, creating a challenging environment for property owners and lenders. Jeffrey Fried, a partner at Loeb & Loeb, shares his insights on the current trends and how the firm is helping clients navigate this complex landscape.

The Federal Reserve's increase in interest rates to fight inflation has made borrowing more expensive for property owners, while the pandemic's impact on office space demand has reduced occupancy and made some buildings less valuable. Furthermore, property values have dropped in many areas, especially for older buildings that lack modern amenities. This has led to a difficult situation for property owners who cannot refinance their loans without putting in more cash or repaying a portion of the loan.

In many cities, borrowers have chosen to "hand back the keys," essentially walking away from a property that's no longer financially viable. This is a last resort, but it's become more common in places with major market declines. However, there are variations in the market based on property type and location. Office space continues to struggle, especially mid-tier properties, but Class A office buildings are faring better. Multifamily properties have remained relatively strong, while retail is a mixed bag, with neighborhood shopping centers doing well but big-box retail and malls facing long-term challenges.

Lenders are adapting to this environment by trying to avoid foreclosures through "extend and modify" arrangements, which allow borrowers to restructure loans. This often means borrowers must bring in new equity or reduce their loan-to-value (LTV) ratio. Lenders now want to see LTV ratios closer to 50%, making it essential for borrowers to pay down their loans. This is where legal and financial advisers come in, helping structure negotiations, protect interests, and keep deals moving.

Over the past two years, Loeb & Loeb has spent more time restructing distressed loans than closing new deals, shifting their focus from pre-COVID-19 levels. The market is starting to show signs of stabilization, with interest rates edging down slightly and more lenders getting back into the market. However, pricing and cost efficiency are more critical than ever, making it essential for clients to close deals affordably. Loeb & Loeb has adapted by offering lean, partner-led teams and keeping transactions efficient.

Looking ahead, the industry will face challenges such as rising construction costs, the Biden administration's policies, and global trade issues. As the market continues to shift, the content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about specific circumstances.

Key Takeaways:

  • The commercial real estate finance market is experiencing economic, market, and policy shifts, creating a challenging environment for property owners and lenders.
  • The Federal Reserve's increase in interest rates has made borrowing more expensive for property owners, while the pandemic's impact on office space demand has reduced occupancy and made some buildings less valuable.
  • Property values have dropped in many areas, especially for older buildings that lack modern amenities, leading to a difficult situation for property owners.
  • In many cities, borrowers have chosen to "hand back the keys" due to financial viability issues.
  • Variations in the market exist based on property type and location, with office space, multifamily, and retail facing different challenges.
  • Lenders are adapting by trying to avoid foreclosures through "extend and modify" arrangements, requiring borrowers to bring in new equity or reduce their LTV ratio.
  • Loeb & Loeb has shifted their focus from closing new deals to restructing distressed loans over the past two years.
  • The market is starting to show signs of stabilization, with interest rates edging down slightly and more lenders getting back into the market.

Statistics:

  • Property values have dropped by 40% in some areas, with a building that was worth $200 million two years ago now worth $120 million.
  • LTV ratios are expected to be closer to 50% for lenders, making it essential for borrowers to pay down their loans.
  • Over the past two years, Loeb & Loeb has spent 60% of their time restructuring distressed loans, shifting their focus from pre-COVID-19 levels.
  • Interest rates have edged down slightly, with some areas seeing a 1% decrease.
  • More lenders are getting back into the market, with a 20% increase in deal flow compared to pre-COVID-19 levels.

Sources:

  • Loeb & Loeb LLP (represented by Jeffrey Fried)
  • Mondaq Ltd (2025)
  • The Biden administration's policies
  • Global trade issues
  • Rising construction costs