The Discussion: The Future of the Housing Market and Commercial Real Estate; Insights from Industry Leader Don Peebles
Introduction:
Recent data indicate that the housing market is beginning to cool, as evidenced by an increase in “For Sale” signs and a rise in new mortgage applications. The market is experiencing a complex interplay of factors that are shaping its trajectory. To provide a deeper understanding, Don Peebles, Chair and CEO of Peebles Corporation, shared his expert insights into the current state of the housing and commercial real estate markets during a recent interview.
Housing Market Dynamics:
Peebles highlighted a noticeable shift in the housing market. Despite a rise in new mortgage demands and an increase in single and multifamily housing starts, the market remains supply-constrained. This limitation in supply continues to drive up prices in most major metropolitan areas across the United States. Peebles noted that 93% of the top 50 metropolitan markets are seeing price increases in both rents and home prices.
However, specific regions like Florida, which has seen significant price appreciation since 2018, are starting to experience a pullback. This moderation is a natural consequence of the rapid price increases over the past few years. Despite this, the overall housing market remains robust due to the persistent supply constraints and high demand.
Challenges in Commercial Real Estate:
Turning to the commercial real estate sector, Peebles pointed out the challenges posed by the lending environment. Regional and local banks, which have significant exposure to commercial office buildings, are facing difficulties as many of these properties are struggling, particularly in major markets. The pandemic has exacerbated these issues, leading to a cautious approach from banks regarding new loans.
At 2:34 in this video, Miami, along with Boston, San Francisco, and Charlotte, is displayed among a list of “cities of opportunity.”
Opportunities in Private Credit:
Amid these challenges, Peebles identified private credit as a significant opportunity in the commercial real estate market. Since regulatory changes discouraged banks from making high-volatility commercial real estate loans, private credit has stepped in to fill the gap. With banks now hesitant to issue new loans due to rising interest rates, private credit lenders can capitalize on the opportunity to secure high-quality loans without facing as much competition.
Peebles explained that private credit underwriting is more individualized compared to the formulaic approach of banks, allowing for better decision-making and potentially more secure investments. This adaptability and focused approach make private credit a promising avenue in the current market environment.
Regional Market Insights:
Peebles highlighted specific markets such as Boston and the Bay Area as having significant opportunities due to their supply-constrained nature. These regions, known for their high demand and limited supply, continue to perform well. He also mentioned that despite the general trend of a cooling market, some areas still offer attractive investment opportunities due to their unique supply and demand dynamics.
Future Outlook:
Looking ahead, Peebles provided a cautionary outlook for the commercial real estate market. He described the current situation as a “calm before the storm,” with many local and regional banks holding substantial commercial real estate loans that have not yet faced foreclosure actions. As these foreclosures begin to increase, there could be a ripple effect leading to job declines and significant losses in the commercial banking sector by 2025.
Conclusion:
Don Peebles’ insights offer a nuanced perspective on the housing and commercial real estate markets. While the housing market shows signs of cooling, it remains resilient due to supply constraints. In contrast, the commercial real estate sector faces significant challenges, but opportunities in private credit offer a silver lining. Investors and stakeholders should prepare for potential turbulence ahead, especially in the commercial sector, while remaining vigilant for emerging opportunities.