Commercial Real Estate Financing Is Not Heading Back to What We Got Used To

This blog won’t be a take on the statistical projections and data-driven predictions you hear about the real estate markets on the news – yes, there are economic fluctuations that highly affect doing business; yes, investments during a crisis period are usually a good idea; yes, lending is rising, but there is a lot of uncertainty surrounding the upcoming period.

Simply outlining numbers and statistical data works, but there is a more substantial story behind it. Putting things into perspective is always more valuable. I know it’s easier to hide behind the numbers. Still, the reality is that a large part of the commercial real estate market is being pushed in a direction where some of the most creative and unprecedented things are happening.

I’ll explain.

Let’s take, for example, a business in the hospitality industry that is looking for new markets to develop. Say that business managed to push through the past two years of COVID, and with the touristic upturn this year, it is looking to shift gears and expand. The first instinct would be to talk to the bank, right?

Wrong.

Money Is Not Cheap – Things Are Done Differently Now

The global economy is not what it was years back.

Money is hellishly expensive these days. Especially in the US and EU markets, where borrowing money is an essential part of the business culture, there is a significant fear of interest rates soaring higher than ever, with high inflation at the driving seat.

So there’s an interesting situation here.

Tourism is back, yet there’s an economic crisis, and people have less money to spend – meaning they need loans. And hospitality businesses need money to attend to growing demand. As the demand for money rises, the supply is not following it (as much as we would all like to print money, it’s not always possible).

So, this difference influences the price of money – simply said, the higher the inflation, the higher the cost of money.

To put things in the industry perspective, real estate financing is an essential part of real estate development, and as the real estate market continues to evolve, so too does the way real estate developers pay for their projects.

Recently, non-bank financing has become increasingly popular among real estate developers, which can provide them with more flexible and attractive terms than traditional bank loans. Hence, the investor I mentioned earlier is more likely to look for his luck in privately owned funds and venture capital partnerships.

Non-bank financing is typically provided by private lenders, venture capitalists, funds, and others who are willing to take on real estate risk. Generally, such private investors are looking for a higher return than real estate owners would receive from a traditional bank loan. But it’s not all grim.

This can be beneficial for real estate developers since they have access to capital and a network that may not be readily available from a traditional lender. Additionally, non-bank financing often offers more flexible repayment terms, higher leverage rates as well as flexible options of return than bank loans. As such, real estate developers can invest in larger projects that may otherwise be impossible if relying solely on bank financing.

Locations Provide Unique Experiences Vs. Experience Dictates Location

Real estate investors are moving beyond just looking for already developed locations and are now placing a greater emphasis on locations when making decisions. This shift is driven by the belief that locations that will become desirable over time could yield higher long-term returns, even though upfront costs may be slightly higher.

Besides changes in financing, another major trend I foresee will likely be the shift away from ultra-expensive development projects towards projects that provide unique experiences for tourists.

This could include anything from “hotel plus” concept hotels with unique experiences, such as cooking classes or art galleries, to luxury villas with services like personal chefs or massage therapists on site and many other family activities. Such an offering could potentially not only draw in higher numbers of tourists but also generate higher profits for real estate developers (partners included), as well as help them remain competitive against other real estate markets worldwide.

Take, for example, the Magic Castle hotel in Los Angeles. This hotel was ranked second among the most appealing hotels in LA ranking. What’s special about them? In every room, there’s a red phone, and when you pick it up, a person with a tray of candy arrives. A candy SOS line of sorts. In the pool, there’s an SOS line for popsicles. There’s also room service for board games.

Imagining a luxurious venue? Check out a screenshot from Tripadvisor:

Image courtesy of Tripadvisor for Magic Castle Hotels California, USA

Couple this with the rise of hospitality guest experience solutions, treating hospitality as an art such as Duve, and the picture becomes quite clear…

Another great example would be CenterParcs from France. When swimming in the jungle seems a bit of a stretch, they provide the alternative by bringing the jungle a bit closer to home. In reality, they’re merging nature with a modern hospitality experience to merge the best from both worlds. Just check out the picture from their main swimming area found on their website…

Image courtesy of: Aquamundo, CenterParcs.eu

The interesting projects will win

Private equity firms and venture capitalists will surely strive to continue providing funds for real estate developments worldwide, while crowdfunding platforms open doors for anyone with internet access to invest in commercial real estate projects anywhere. This will allow the democratization of access to high-value investments that were once only accessible by wealthy individuals or institutions, and it’s a major game changer.

The markets are surely changing, and there are more options than ever.