Commercial Property Finance – Our Year in Review

2024 was a year of adjustment and resilience for commercial property finance. While rate relief remained a topic of anticipation, the market adapted to a stabilised high-interest-rate environment. Liquidity stayed strong, with lenders actively competing for quality transactions, and construction challenges began to stabilise. Here are some of the key themes Stamford Capital saw for 2024. 

High liquidity in market

Liquidity in the debt capital markets remained robust throughout the year. From smaller non-bank players to major lenders and larger balance sheets, there was no shortage of capital for quality transactions. As we near the end of the year, we’re still seeing an abundance of capital in market seeking deals. With competition for quality, derisked deals, the best sponsors with the best locations are attracting the sharpest margins we’ve seen for a while. 

Lender patience remained 

With some stability in interest rates, lenders are more comfortable lending at higher leverages than they were a year ago. We anticipate some remaining unwinding of asset prices, particularly those bought on yield, however the worst seems to have passed. Lenders continue to work with investors who bought at the top of the market and now are breaching or at risk of breaching their LVR or ICR covenants. If borrowers pay their interest, lenders generally are offering support and leniency.  

Construction challenges stabilised 

Construction costs steadied, but historically high land costs mixed with high building costs caused some projects to struggle with viability.  A shift towards a “developer-builder” model emerged as developers sought a solution to higher third-party contractor pricing. Lenders have generally supported these initiatives where expertise and experience is aligned.  

Residential development barriers

Persistently high construction costs kept the affordable apartment sector constrained, though premium and Build-to-Rent developments gained traction. Build-to-Rent, once dominated by large institutional players, now sees participation from more sophisticated private developers. As a result, we’ve seen funding options open up in this space too, as rental vacancy rates across the country sit at all-time lows.  

High interest rates have slowed housing nationally, and we’ve seen declining values in regional markets off the back of COVID-induced highs. Capital cities have remained robust and have the potential for an uptick, as interest rate relief arrives. 

Interestingly, we have funded more residential land subdivisions this year than any other year since inception – hopefully a small step to easing some of the affordable housing supply issues around the country.  

Commercial property yields  

Commercial investment assets continued to unwind over the year. The more susceptible assets are those in secondary locations, in need of capex, with weaker tenants or tenants exposed to discretionary spending. We haven’t seen the market inundated with distressed assets, although some astute investors have managed to purchase assets at or below replacement cost. This can sometimes be a sign of the bottom of the cycle.  

We saw investment debt sharpen in price markedly over the course of the year. Strong assets, locations, sponsors and tenants are regularly receiving margins at or below 1.50% from all major and second-tier banks. There are also some good offerings from the private credit market for higher leverage or weakened tenancy profiles.   

Looking Ahead

Despite a year of adjustment, market liquidity and borrower-friendly conditions have created opportunities. Residential demand will continue to create opportunity next year and lenders are offering competitive terms, higher leverage and no presale options. Bank appetite is also strong for this asset class.  

On the investment front, the promise of rate relief is giving lenders security to drop their ICRs, focusing instead on the asset, tenant and sponsor quality. Office is still weakened by the continuation of the work from home trend; however, Stamford has executed on several office deals in the bank and non-bank space this year.  

It truly is a borrower’s market. But with the added competition in the private credit market, due diligence is crucial when it comes to selecting a capital partner. Make sure that you’re in the best position to take advantage of next year’s opportunities by speaking to your Stamford broker.