Loeb & Loeb partner Jeffrey Fried gives an insider perspective on the state of the commercial real estate finance space, what's driving current trends and how we're helping clients navigate a path forward. Whether you're an investor, a property owner or simply trying to understand how rising rates affect real estate, this piece offers practical insight into a dynamic and often misunderstood market.
Tell us about your practice and the types of real estate finance matters you generally handle.
I represent banks and financial institutions in structuring and restructuring permanent, construction, mezzanine and leasehold loans, including bilateral, agented and syndicated facilities, across asset classes in New York and nationwide.
What's driving these challenges, and how are they impacting property owners?
A mix of economic, market and policy shifts has created a tough environment. First, the Federal Reserve increased interest rates to fight inflation. That made borrowing more expensive for everyone, including property owners.
Second, the pandemic changed how we use space. Office buildings, for example, have been hit hard because many people now work remotely at least part of the week, which reduces demand for space, lowers occupancy and makes some buildings less valuable.
Third, due to many factors including increased interest rates and lower occupancies, property values have dropped in many areas, especially for older buildings that don't have the modern amenities that are in demand by consumers. To put this into context, a building that was worth $200 million just a couple of years ago might only be worth $120 million today. If the owner still owes $140 million on a loan based on the original $200 million valuation, they're in a difficult spot. They can't refinance without putting in more cash and repaying a portion of the loan, and the lender will not want to renew the loan unless the numbers make sense.
In many cities, borrowers have chosen to "hand back the keys," essentially walking away from a property that's no longer financially viable. That's often a last resort, but it's become more common in places with major market declines.
Are any parts of the market doing better than others?
Yes, there's a lot of variation based on property type and location. Office space continues to struggle, especially mid-tier properties. However, Class A office buildings—high-end properties in desirable metropolitan areas—are faring better because they attract premium tenants and offer amenities that support hybrid work models.
Multifamily properties have remained relatively strong. People always need a place to live, and demand for rentals is high in cities such as New York, where there's a constant housing shortage. However, in some cities, overbuilding has created a temporary oversupply, which is putting pressure on rents and returns.
Retail is a mixed bag. Neighborhood shopping centers anchored by grocery stores have done well, but big-box retail and malls continue to face long-term challenges. On the positive side, some parts of New York's office and retail markets have started to rebound—leasing activity in Midtown Manhattan, for example, is approaching pre-COVID-19 levels.
How are borrowers and lenders adapting to this environment?
One of the biggest themes in the market is "extend and modify," meaning lenders are trying to avoid foreclosures by working with borrowers to restructure loans. Most lenders don't want to own property. Their goal is to keep the loan performing, even if it means adjusting the terms.
For borrowers, that often means bringing in new equity or reducing their loan-to-value (LTV) ratio. The LTV ratio compares how much you owe on a property to what it's currently worth. If your building is worth $100 million and you owe $80 million, your LTV ratio is 80%. Many lenders now want to see LTV ratios closer to 50%. That means borrowers have to pay down their loans, often by bringing in millions in fresh cash or finding a new partner.
This is where legal and financial advisers come in. We help structure these negotiations, protect our clients' interests and keep deals moving. Over the past two years, we've spent more time restructuring distressed loans than closing new deals, which is a major shift in focus from before.
What's the outlook, and how is your firm helping clients prepare for what's next?
The good news is that the market is starting to show signs of stabilization. Interest rates have edged down slightly, and more lenders are getting back into the market. We're seeing more new deal flow, and there's cautious optimism for the future.
That said, pricing and cost efficiency are more important than ever. Our clients are under pressure to close deals affordably. We've adapted by offering lean, partner-led teams and keeping transactions efficient. That's become a key differentiator in a market where even legal services are competitive.
Looking ahead, the policies coming from the current administration, global trade issues and other issues such as rising construction costs will force the industry to get creative and play a role in shaping the next chapter for commercial real estate. For example, retrofits and converting outdated offices into apartments are gaining interest but remain expensive and complex.
As the market continues to shift, raising important questions about property values, refinancing options and lender expectations, our team has been supporting clients in answering these questions by staying attuned to market trends and exploring practical solutions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
