5 Promising Opportunities in an Uncertain Market

Interest rates, heightened operating and capital costs and geopolitics will impact commercial real estate this year. The prospect of significant rate cuts in 2025 has dampened, intensifying the need for rescue capital solutions. Additionally, eyes are on the incoming administration and its future impacts on the industry. Despite the uncertainties accompanying these dynamics, opportunities exist across multiple asset types, especially for investors with the acumen to thrive during periods of uncertainty. Here’s a look at some of what is appealing to investors in today’s climate. 

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1. Pick your office spots

The uptick in companies mandating employees return to the office is not enough to counter COVID-19’s impacts. Many agree commodity office will never reach pre-pandemic occupancies. Much of the empty square footage is considered obsolete and remains a pain point for banks as loan delinquencies rise.

Office investment opportunities do, however, exist across certain markets and where specific industries are driving leasing activity to the top-tier buildings. One example is New York City, where heavy-hitter financial institutions have instated back-to-work initiatives. Another is in tech-heavy markets where the AI industry is propelling leasing activity. A third is the in-demand region of South Florida, where a high volume of workers and employers relocated to in recent years.

Thus, while many lower-end troubled assets may never be re-tenanted, high-end properties remain attractive to tenants. Trophy assets are actively served by the capital markets arena. However, of note is the asset class a half-tier down. These still class A, well-appointed, boutique office assets are widely sought after, but not thoroughly served by the capital community. Thus, they are attractive to investors, especially in markets like New York and South Florida.

2. Multifamily maintains appeal

With new construction now slowing, many are priced out of homeownership, and demand for rentals is strong, so multifamily remains attractive. Because of interest rates, some apartment borrowers are now over-leveraged and in need of rescue capital. Participation here, or in the purchase of non-performing debt, presents a couple of opportunities for multifamily investors.

Some investors are also enticed by tax-advantaged structures available in some markets with housing finance corporations. Under certain structures, real estate tax obligations are eliminated if an affordability component is maintained. The affordable rental marketplace is also gaining attention. With new construction difficult to pencil, protecting existing supply is critical. Some investors are helping GSEs provide financing by purchasing B-piece securities generated from GSE loans issued to apartment community owners. Notably, the strong credit quality of these B-piece products is provided via strong agency credit standards.

3. Senior housing needs operating partners

The senior housing marketplace has steadily recovered post-pandemic. However, there is a housing shortage, in part, because of the influx of aging Baby Boomers. This opens significant opportunities to investors. However, senior housing is niche, so a proven operator is needed to succeed.

Opportunities exist with communities that are over-leveraged or managed by operators either unskilled or struggling with limited capital. Investors are entering in a rescue capacity, purchasing the non-performing debt or, when opportune, buying the asset from forced sellers at favorable pricing.

4. Student housing supply-constrained

Student housing fundamentals have outperformed other asset classes recently, and investor interest in the sector has thus increased. Like other real estate, this sector has experienced heightened capital costs, making new development more challenging. New bed deliveries are down and construction near universities has become increasingly difficult. Poorly managed and over-leveraged communities, especially those adjacent to growing schools, are particularly attractive now.

5. Bank distress yields investments

Investment in distress has been top-of-mind for a while. Elevated interest rates, commercial real estate valuation drops and difficulty in refinancing existing debt has resulted in non-performing commercial real estate loans and constrained credit. Interest rate reductions are not coming fast enough to fix all the troubled assets on bank balance sheets. Compounding the issue is the more than $2.2 trillion wall of U.S. commercial real estate debt coming due for repayment by year-end 2027. Another surge in defaults is likely coming.

In many cases, banks are being forced to dispose of problem loans, resulting in three types of investment opportunities. The first—FDIC structured transactions—shifts bulk problematic commercial real estate loans to private sector partners. The second opportunity, often M&A driven, are privately negotiated bank transactions where one or both institutions requires the other to dispose problematic real estate loans as part of the merger negotiation. Banks may also dispose of these assets when seeking an infusion of capital to shore up their capital structure. The third opportunity is with single-asset transactions. These may be comprised of loans on bank balance sheets, loans with shadow banks or recapitalization needs at the asset level requiring a new capital infusion. The pipeline for this third category is expected to increase substantially over the next couple of years as time runs out with current borrowers/owners.

Tal Seder is managing director with Sabal Investment Holdings, the real estate investment management firm serving institutional investors.