Why Many CRE Deals Are Delayed Until Late 2025 and Beyond

Many investors are asking about the timing of exits for commercial real estate (CRE) deals funded in 2022 and earlier. Originally, these deals were underwritten with a 3-5 year exit strategy, and some are now approaching their expected exit timelines. However, significant changes in market conditions have altered these plans.

In 2022 and 2023, the Federal Reserve raised interest rates at an unprecedented pace, keeping them at high levels until September 2024, when the first rate cut occurred. This aggressive rate hike cycle, combined with other factors, has strained commercial real estate markets:

• Rising Insurance Costs: Insurance premiums have spiked, increasing operational costs.
• Inflation Pressures: Budgets are strained as construction and maintenance costs continue to rise.
• Increased Competition: New developments have created competition for rents, making it harder for older properties to maintain occupancy and pricing power.
• COVID-Related Challenges: Eviction moratoriums during the pandemic delayed many business plans, further complicating the ability to execute on original projections.

These issues have led to a “slow and low” market, where transaction volumes hit incredibly low levels in 2023 and 2024. Most deals that closed involved motivated sellers accepting discounted offers from bargain-seeking buyers. As a result, asset valuations have been significantly depressed due to the “higher for longer” interest rate environment, coupled with tight bank lending conditions.

The CRE market heavily depends on lower interest rates for strong performance, and we are only just beginning the rate-cut cycle. Lower interest rates typically improve Debt Service Coverage Ratios (DSCR) and make higher leverage possible, which can drive up returns on equity. However, given that rate cuts have only just begun, many sponsors and operators are delaying their exits, preferring to hold properties until conditions improve.

Tempo Advantage Fund, LLC offers an opportunity to benefit from these market conditions by investing in mezzanine debt and preferred equity, which provide strong returns even in the current environment.

The Federal Reserve’s first rate cut in September 2024 marks the start of what is likely to be a gradual reduction in interest rates over the next 1.5 to 2 years. Historically, lower interest rates lead to lower cap rates (increased asset valuations), but this recovery will take time.

• Better Lending Conditions: As rates drop, banks will likely ease lending restrictions, making financing more accessible and boosting valuations.
• Improved Returns: As the cost of debt decreases, returns on equity should improve, allowing property owners to execute on their business plans.

Most property owners and sponsors are choosing to wait for these improved market conditions before exiting their deals, as selling now would likely result in poor returns.

As a result of these delays, many projects that are “equity rich but cash poor” require recovery capital to stay afloat. This is where mezzanine debt or preferred equity can come into play, providing the necessary capital to carry these projects through the downturn and position them for future success.

Investing in recovery capital through the Tempo Advantage Fund, LLC offers an attractive opportunity. These investments provide a defensive position in the capital stack, while also giving existing equity investors the chance to recoup their investments once the market recovers in 1.5 to 2 years.

It’s important for investors to evaluate which projects have the potential to recover with additional capital injections and which should be written off. The recent market reset has created new opportunities, especially for those willing to invest in mezzanine debt or preferred equity. This type of capital provides a high level of safety, particularly in today’s challenging market, and allows for attractive returns in the near future.

We encourage you to schedule a call with us to discuss how the Tempo Advantage Fund can fit into your investment strategy. Please visit TempoFunding.com/IRCall to arrange a time that works for you.

While it’s true that “past performance is not indicative of future results,” the current market reset creates asymmetric opportunities—particularly in mezzanine debt. Tempo Advantage Fund, LLC is positioned to offer strong returns while managing risk effectively. We look forward to discussing these opportunities with you in more detail.