The FT yesterday focused on the state of the commercial real estate market, looking at the difficulties and opportunities faced by developers and lenders alike. We looked earlier this year at the Ten-year low reported for UK lending in commercial real estate – the FT now asks whether the worst has passed or is yet to come, given that valuations lag and the results can therefore take years to emerge. Interest rate increases since March 2022 have squeezed margins on debt financed commercial real estate, with prices across commercial property falling about 20% in the same timeframe, although low deal volume makes it difficult to assess true value. But as the FT points out, there hasn’t been a crash in the market, perhaps partly because neither owners nor lenders want to acknowledge the decline in valuations (the age-old “amend and pretend” strategy) but also because debt levels coming into this period were lower than they were pre-2008.

The FT points out that when you break down the analysis into sub-sectors, the picture is more mixed, with office space reportedly making up the majority of actually or potentially distressed real estate finance. But even there, that sector is small enough to not threaten the overall stability of the real estate market. We continue to see opportunities across a number of sub-sectors (including warehouses and logistics), with a continued focus on quality and pricing, plus innovative lending features which provide flexibility in the early stages of development of new sites or redevelopment of existing sites. But there remains no doubt that the anticipated coming reduction in interest rates would help ease pressure on margins – which can only facilitate continued recovery in the sector.