The International Council of Shopping Centers (ICSC) annually hosts the largest commercial real estate gathering in the world. This premier event took place May 19-21, 2024 and drew over 30,000 industry professionals.
It’s no secret that real estate faces a challenging market climate. A March 2024 McKinsey report discusses how global fundraising plunged 34% in 2023 to just $125 billion amid rising rates. Against this backdrop, one panel on raising funds in a tight market proved particularly insightful. Seasoned experts outlined creative strategies for managing through today’s restricted financing landscape.
No stranger to capital raising difficulties,the panelists provided real-world ideas for today’s fundraising hurdles.
Panelist profiles
The panel moderated by Jamila Abston Mayfield of The Jamila Mayfield Group, LLC featured a diverse group of real estate practitioners providing their thoughts on capitalizing projects in today’s market:
- John J. Manginelli: Senior commercial lender at KeyBank
- Edward Nwokedi: Blockchain finance innovator and founder of RedSwan CRE
- Charlie O’Connell: Real estate developer CFO at DJM Capital
- Jeffrey Rink: Public finance expert leading efforts at KeyBanc Capital Markets
Current real estate market trends and overview
The panelists painted a picture of a very tight real estate capital market environment driven by rapidly rising interest rates over the past year. As John Manginelli stated, “I think every deal is perceived as over-leveraged. I wouldn’t say it’s over-leveraged. I think none of us here, even the old people like me, haven’t lived through a 500 basis point rate increase in such a short period of time.”
This rate volatility has led to reduced leverage available from lenders, with senior loan proceeds now typically only around 60% loan-to-cost, according to Jeffrey Rink. Equity requirements have consequently increased significantly.
The higher rates have also impacted valuations and cap rates. Ed Nwokedi noted discussions of cap rate increases of 200-300 basis points, representing major drops in property values that leave some owners overleveraged on existing loans.
There is an increasing bid-ask spread between seller price expectations based on historically low cap rates and what buyers can now underwrite to make deals pencil out financially.
The panelists did provide some optimism about certain asset classes, like grocery-anchored retail and lifestyle properties, which have rebounded strongly from the pandemic period. Multifamily also remains relatively healthy compared to other sectors.
Overall, it is a very capital-constrained environment requiring owners and developers to get creative on capitalization strategies.
How to navigate fundraising in a challenging market
The panelists discussed six key themes for today’s environment.
Capital stack strategies
Amid tightened lending conditions, developers and real estate firms must pay close attention to strategically structuring their capital stacks. With a 40% equity gap for most deals, strategies discussed to fill this void include:
- Bringing in preferred equity investors or mezzanine debt funds to take subordinate positions.
- Monetizing incentives and tax credits to reduce the required equity portion.
- Packaging multiple properties together in one financing deal to maximize proceeds.
- Renegotiating with lenders as even modest refinances providing little/no cash-out are considered wins.
Alternative capital sources
Developers and firms should look to sources like preferred equity investors who can help fill the equity gap created by reduced leverage from senior lenders.
- Exploring off-balance sheet lenders, debt funds, friends/family, and institutional investors as equity sources.
- Potentially converting existing equity stakes into preferred equity positions.
- Bringing in new equity partners to buy out portions of existing stakes.
Municipal finance strategies
Developers should not overlook public finance mechanisms to fill capital stack gaps. Tax Increment Financing (TIF) or special assessment districts allocate future property tax revenue increases in a designated area to fund redevelopment projects there.
Municipalities can package and sell bonds to investors backed by the rights to those designated future incremental tax revenues. This allows developers to monetize those committed future tax proceeds into upfront cash for project costs today.
The growing role of tokenization
Tokenization involves converting equity ownership in real assets like real estate into digital securities or “tokens” that can be fractionally sold to investors worldwide. This opens up new capital sources and provides potential liquidity by allowing token holders to trade their equity stakes on exchanges before a full property sale.
Panelists also discussed how tokenization provides more cost-effective distribution by letting licensed broker-dealer platforms market the digital securities at scale across their client networks. This streamlines marketing and sales compared to traditional real estate fundraising.
While the SEC has yet to confirm a preferred registration pathway for tokenized real-world assets, many see strong future potential benefits.
Municipal collaboration
Forming collaborative partnerships with municipalities can unlock valuable financing options. Developers should proactively engage these public partners early in the process, as Rink advised, “If you don’t ask, you’re never going to be offered” potential incentives.
The key is persistent relationship-building efforts over time. By working closely with municipal staff, developers can help shape incentive structures that are mutually beneficial – attractive to the city’s interests while also practical to leverage with private financing sources.
An open, communicative approach engaging both municipalities and lenders can provide access to valuable collaborative financing models benefiting all parties over the long-term.
The importance of adaptability and a long term perspective
The current financing market requires adaptability. Owners and developers must remain nimble and open to pivoting strategies as capital sources evolve with changing market cycles and lender expectations around leverage and underwriting. As Charlie O’Connell emphasized, “The availability of debt keeps changing…We’re talking about a tight market.”
Taking a long-term view rather than fixating on short-term volatility can provide opportunities. The panelists highlighted retail properties that initially struggled during the pandemic but then rebounded for lifestyle and grocery-anchored assets. Ed Nwokedi stressed expectations of rapid interest rate declines may be too optimistic, requiring a longer horizon before financing costs normalize.
An adaptable mindset willing to explore creative solutions, combined with positioning for the next market upswing, will be vital. As O’Connell stated, “It takes time,” and the need for “making long-term decisions to invest capital”. Nwokedi noted patient capital able to “pretend and extend” may find opportunities others miss.
Wrapping up
As the real estate market continues to face challenges, the insights from this year’s ICSC panel provide ideas on how to overcome obstacles and capitalize on new opportunities. The creative strategies and expert perspectives shared reflect current market pressures and innovative pathways forward.
