Bay Area tops list of most concerning markets for CRE lenders

Commercial real estate lenders have cast a wary eye on the Bay Area, where tech layoffs and historic amounts of vacant office space are compounding concerns about rising interest rates and fears of a recession.

The Bay Area was ranked first on a list of 10 markets that lenders are most concerned about in terms of performance in 2023, according to a report released by real estate firm CBRE this month Phoenix and Portland rank No. 2 and 3, respectively, with West Coast markets Las Vegas, Los Angeles and Portland also appearing on the list.

The report is significant because lender sentiment about regional markets influences where capital for new development projects as well as the recapitalization and refinancing of existing properties flows. Sun Belt and high-growth secondary markets show promise this year. CBRE's report ranked Miami/South Florida, Raleigh-Durham and Atlanta as the most preferred markets in 2023. Per the report, entitled 2023 U.S. Lender Intentions Survey, lenders' top three concerns were rising interest rates, fear of a recession and uncertainty about property valuations. Other worries include declining fundamentals; inflation; the shift in credit availability and loan terms; a mismatch in buyer and seller expectations; other central bank policy and the impact of currency fluctuations. The report indicates that most lenders expect to underwrite more conservatively in 2023, and expect that inflation will peak in the first half of the year but remain relatively high. A total of 57% of lenders surveyed believe that the inflation rate will fall between 4% and 5.5.% at year-end 2023, and 38% of lenders expect that the 10-year Treasury rate will peak in the first half of the year. The Bay Area's unsavory ranking is unlikely to come as a surprise to industry stakeholders. The region has been particularly challenged by the rising popularity of remote work, and more recently by widening tech layoffs — including at Salesforce, the city of San Francisco's biggest employer — though job growth has remained positive and unemployment rates low. CBRE reported this month that office vacancy in San Francisco is nearing 28% and expected to grow in the first half of the year. And downtown investment sales over $25 million last year in San Francisco, San Jose and Oakland hit their lowest mark in more than a decade. On the bright side, life sciences properties have emerged as the preferred alternative sector for lenders, and the Bay Area is rich in biotech clusters. According to a mid-year 2022 report by real estate firm Newmark, the Bay Area life sciences market was ranked as the second most significant such cluster in the country, and South San Francisco remained the Bay Area’s top submarket in terms of inventory, rents and demand. However, CRBE reported that the Bay Area life sciences market saw a "slight deceleration" in demand during the third quarter of 2022 with market-wide vacancy rising to 6.2%. Industrial and multifamily properties remain the favorite property types in the eyes of the lenders surveyed — 26% said that their companies are currently financing industrial and logistics properties, while another 26% said that they are financing multifamily properties. Other properties currently being financed include:

• Retail (18%)

• Office (15%)

• Hotel/resort (15%)

• Land (1%)

Looking ahead, a majority of lenders — 41% — said that industrial and logistics will be the preferred property types for lending in 2023, followed by:

• Multifamily (39%)

• Retail (16%)

• Hotel/resort (4%)

None of the lenders surveyed listed office and land as preferred property types for lending.