RREAF Holdings CEO: ‘Banks are pulling out of the commercial real estate space

Bill Hethcock, Dallas Business Journal, 26 May 2023

With the significant run-up of interest rates, persistent recession fears and a regional bank crisis triggering a lending clampdown, commercial real estate developers and investors face economic headwinds that show few signs of easing soon.

Against that backdrop, Kip Sowden and his son, Graham Sowden, see both opportunities and threats for Dallas-based real estate development and investment firm RREAF Holdings, which focuses on multifamily, hospitality, and more recently, RV park acquisition and redevelopment.

In the following interview, Kip Sowden, who is chairman and CEO of RREAF Holdings, and Graham, the firm’s chief investment officer, discuss the difficult lending environment, how RREAF is reaching to it, and more.

What is the state of the lending market?

Kip: It has become much more costly, obviously. Lenders are far more conservative in their underwriting than they were prior to recent times. The community and regional banks are still active in making loans to commercial real estate sponsors and developers, but they are focusing more on the seasoned developers. Developers with tenure in the space.

Graham: (Banks are focusing on) those with better credit and a better track record. We saw a huge influx of new syndicators popping up left and right over the last five to six years. It was tough to miss (on properties and projects). We had kind of “free money” going around. People were overpaying for assets.

Kip: There was a lot of debt in the market. Lenders were far less stringent on their underwriting parameters. That's all changed today and it's really just your top-tier sponsors and your top-tier developers that are able to obtain financing, and financing is much more expensive than it was 12 to 18 months ago.

How are you reacting to that change?

Graham: You've got to be much more selective as a buyer in the properties and markets that you're selecting to enter and in obtaining both development loans and acquisition loans from community and regional banks.

Is multifamily development still RREAF’s main focus?

Kip: It's actually one of seven verticals. We own some 60 apartment communities and 14,000 units. Today, we are active in the RV park space acquisition and redevelopment. We are active today in developing two large resort hotels and seven apartment communities. We've got approximately $700 million in development today. We're also developing extended-stay hospitality all over the country. We're in the market with different community and regional banks for each of those development deals.

Are banks completely curtailing loans on commercial real estate projects?

Kip: A lot of banks are pulling out of the commercial real estate space, particularly the money-center banks. They're cutting back on the number of real estate loans that they're making. Some of that void is picked up by the community and regional banks and those banks are being very selective in who they will lend money to.

Graham: Then you're seeing that influx of private debt coming into the market and that private debt is obviously much more expensive. All of that results in the pure decline in transactions that we’re seeing. I saw a statistic yesterday that said apartment sales are down nearly 80% year-to-date.

Are you seeing a disconnect between buyers and sellers?

Kip: If a seller is not forced to sell, they're not going to sell in this market. There's still a big gap between bid and ask. If a seller is not forced to sell because their current debt matures, they're not selling.

Do you see that changing any time soon?  

Kip: We do believe that we're going to see more transactions in Q4 and the beginning of '24 when a lot of these sponsors that got bridge financing around two years ago or 18 months ago with high leverage won't be able to refinance and roll out to agency debt without coming to the table with a big check. Some might not be able to stroke that check. So they're going to be forced sellers.

Geographically, RREAF is developing and acquiring properties primarily throughout the Sunbelt, right?

Kip: Yes. We're very fortunate. In these economic times where you've got some headwinds in commercial real estate, location matters. It's very, very important. Location, location, location. We transact primarily in Texas and the south-southeast. Texas and the south-southeast have not experienced and likely won't experience the same level of headwinds that other parts of the country will.

Why is that?

Kip: We continue to see great in-migration and we've got demand far exceeding supply in all things residential, whether it's single-family, single-family rental, BTR (build-to-rent) or multifamily. As a result, the economics still make sense down south.

Within the Sunbelt, what’s different in Dallas?

Kip: We're seeing a great influx of companies moving to North Texas really from the West Coast and the Northeast. With that, population grows. It's the quality of life, it's a business-friendly environment. It's a lower cost of living.

With all the challenges that exist in the market, what are the opportunities?

Kip: What we as a company have always looked for are disconnects in the market. We found that in the RV space today. It's very fragmented. There are a lot of one-property-owner parks out there and we will acquire quite a few of them and institutionalize them. Everything is about scale for us, and we think that there's a real opportunity there. 

This article originally appeared on Dallas Business Journal