Kunstlinger says a bank contact told him candidly that cutting rates 200 basis points wouldn't move the needle on their office deals
While mortgage brokers across both consumer and commercial lending have to focus on many other factors besides the current mortgage rates, it is clear that rates do impact clients and their desire to get deals done.
While that is more pronounced on the consumer side, there are impacts in the commercial market as well. However, elevated rates aren’t the only headwinds working against certain segments in the commercial real estate landscape.
As one veteran broker returns to the broker side of the transaction in his new role, he stresses that some of those headwinds are what is really driving, or holding up, commercial deals.
Elliott Kunstlinger (pictured top), who recently joined Eastern Union as a senior mortgage broker, said the reality of those headwinds became clear following a recent conversation with a contact at a major institutional lender.
"Yes, rates are where they are, and everybody likes to point to that," Kunstlinger told Mortgage Professional America. "But I was having a conversation with a very, very strong contact at a (major institutional lender). And I said, ‘If we did this deal instead of a 7.25% rate, at a 5.25% rate, does it really make any difference?’ And he answered candidly, and he hated the answer, but the answer was no."
Back to the basics
That answer reframed how Kunstlinger thinks about what is actually blocking deals in the toughest segments of the commercial market. The cost of debt is not the obstacle, he said.
"The selling-the-dream kind of thing has kind of faded," he said. "Now it gets back to real estate professionals really trying to underwrite operators as opposed to just — we're buying a 5 cap, and we're going to sell it at a 4 cap. Now it's really about back to the basics of really strong operators."
Kunstlinger said he has seen what that shift looks like in practice. When office got hit hardest, some of his clients moved in specifically because of where prices had gone, with properties that were trading at $1,100 to $1,300 a square foot available at $500 to $600.
"You were able to get those deals done because you had lenders that had debt of $700, $800 a foot on a comp right there, and now the guys are buying it for $500, $600," he said. "And now they're sort of at $300 a foot on the debt side. And it made sense then, blended."
The broader office market has not recovered from that correction, he said, and neither has New York City multifamily. The blend-and-extend posture many lenders adopted to avoid forcing outcomes has stretched longer than anyone expected.
"If we had this conversation three years ago and then said, in three years we're still going to be where we were three years ago, I think we'd all be looking for new jobs," he said. "But yet we're still all here."
Where deals are getting done
The path forward in office and multifamily, Kunstlinger said, runs through operators with the credibility and track record to convince lenders the asset will perform.
"Where I see a little bit of light at the end of the tunnel is — if we could get those strong operators back to buying assets and actually working the asset and building the story, we could get back to those relationships," he said. "Whether they're with savings banks, or whether they're with interesting debt funds."
He said the debt funds that are most useful right now are the ones that came out of the ownership side of real estate because they understand the operational reality of a deal.
"I like the debt funds that used to be in the real estate ownership space because they can understand it from an owner's standpoint,” he said. “So they can navigate through everything from closing to even post-closing on how to look at it as an owner as opposed to just one plus one has to equal two.”
For brokers working in this environment, Kunstlinger said knowing which lenders can think like operators and matching them to clients who can execute is where the work is.
"Now more than ever, a good broker that has good relationships and has a sense of calmness and creativity, and that's been navigating through the process on the ownership side, broker side, or banking side, all that could be extremely helpful," Kunstlinger said.
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