Galligan: CRE Outlook Remains Strong

The commercial real estate financing outlook remains fairly strong despite some uncertainty on the horizon, said Matt Galligan, president of CIT Real Estate Finance, New York.

“The outlook for commercial real estate is strong, although a few questions remain, such as will interest rates go up and will construction get ahead of itself,” Galligan said. “New construction has had a very nice run over the last couple of years, in part because other asset classes are frothy.”

Galligan said that frothiness does not necessarily indicate a CRE bubble. “Of course, when you’re in a bubble, you never know it,” he said. “But, if you pick the strong private equity sponsors and the good locations, and do your homework on the underwriting, you’re better prepared if there is some kind of shock to the system.”

Multifamily, condominiums, industrial and office remain the most sought-after property types, Galligan said. “Multifamily has been a key driver of the sector for some time now, particularly since the price of housing has been high and millennials haven’t been inclined to purchase their own home,” he said. “Millennials have been large renters of properties, in part because they saw their parents go through the trauma of the 2008 Great Recession.”

Galligan said lenders can find commercial real estate opportunities on both coasts in gateway cities including New York City, Los Angeles, Seattle, Portland, Boston and Washington, D.C. “The gateway cities are enjoying growth and will continue to expand,” he said. “It’s been this way for a long time now,” he said. “The expansion in China fueled growth on the West Coast, and trafficking between the U.S. and Europe on the East Coast always creates demand.”

On the other hand, the Midwest experienced more muted growth, Galligan said. “There’s an occasional city, such as Austin [Texas] or Denver that has done fairly well because they have natural resources as well as technology,” he said. “Houston has done well, but with the price of oil decreasing, its commercial real estate market has slowed down significantly.”

A jump in interest rates would “significantly” affect the whole commercial real estate sector, Galligan said. “The price of any of these assets is at extraordinary levels right now, so it will mute the growth in pricing and could actually decrease the cost of real estate,” he said. “What I’m hoping for is that it slows down the amount of money that’s flowing into the industry, as there has been tremendous cash flows into real estate in recent years.”

Last month CIT acquired OneWest Bank, Pasadena, Calif., in a $3.4-billion deal. Galligan said the move doubled the size of CIT’s commercial real estate business. “It also diversifies our business by product type and geography by giving us a stronger foothold into the western markets,” he said. “Before the acquisition, we had about 10 percent of our assets there. Today that number is closer to 50 percent.”