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3 Questions with Michael Franco: 2024 Outlook

We recently spoke with SitusAMC Chief Executive Michael Franco to discuss his outlook for 2024, major shifts and opportunities he sees in the market, and the ways SitusAMC is evolving to serve clients in this dynamic environment. 

Where do you see the biggest opportunities in 2024? 

The interest rate paradigm is vastly different than we have seen in a long time. Rates haven’t been this high since before the Global Financial Crisis (GFC). Given the new dynamic, I see a major secular change in which  banks will be less involved in real estate finance overall, and you will see more capital coming from non-bank sources. One of the drivers of this is Basel III End Game, in which changing capital rules will make it more onerous for banking institutions to participate in certain areas of real estate.  

In addition, about $1.2 trillion in commercial mortgages are set to mature before the end of 2025, and banks are the largest holders of this debt. This means a number of banks are overallocated to commercial real estate and they have issues in their portfolios that they will have to work out. Given these realities, banks will focus on de-risking and more proactively managing their portfolios. 

Private non-bank capital deployed more than $5 trillion into commercial real estate in the decade ending 2022 and is forecast to grow another $600 billion by 2027 (Preqin). We expect to see more non-bank lenders, private credit funds, REITs and investment funds being involved. We also expect to see more securitization activity as an alternative to traditional bank financing. We are well-positioned for this shift and believe we can drive significant value for the expanding universe of CRE participants. 

On transaction volumes, we expect markets to be volatile this year. Recent full-year 2023 results for CRE transaction volumes showed a decline of 51% year-over-year. There are fundamental issues with certain asset classes and, in other areas, you just have overleveraged good assets. As a result, resolution strategies will be associated with secular changes in sectors (ex. office) and on specific assets with new capital needs.  

As for our macroeconomic expectations, our forecast is for the Fed to cut rates three to four times this year such that rates end the year in the 4.35 to 4.60% range on Effective Federal Funds. We expect the 10-year Treasury to bump around 4.25 to 4.35% before declining to 3.70 to 3.80% in 2025 (meaning a return to a more normal upward-slopping yield curve). On sector activity, we expect volume and origination activity to accelerate once market participants adjust to the new normal in interest rates. There’s a lot of opportunity out there.  

How do you think about positioning SitusAMC and its clients for opportunity in the current market? 

In the commercial real estate industry, which is both cyclically sensitive and interest-rate sensitive, the variances seen year-to-year can be quite extreme. This level of volatility demands quick pivots and shifts in priorities. In 2020, when rates hit zero, market participants' biggest concern was building enough capacity to do all the deal flow. With the Federal Reserve raising interest rates 11 times, the market is completely changed. You’ve gone from “how quickly can we hire and train,” to “how do we become more leaner and operationally efficient.” 

At SitusAMC, we have built a business that can navigate market cycles and add value for our clients in all scenarios. That said, we continually ask ourselves, how can we get better? The answer to that is to go out and earn it every day. That’s why our theme for 2024 is “Exhibiting Excellence.” The world is an increasingly dynamic place, and adjusting to change can be difficult; however, we want our clients to know that SitusAMC can be their trusted partner to help them realize opportunities, manage risk, and generate market-leading outcomes.  

On a personal note, what are you grateful for these days? 

Shared experiences. As you’re going through events in life you often don’t appreciate them because you’re so focused on what’s next. When I look at everything our team has accomplished in the last few years — integrating more than a dozen acquisitions, navigating the pandemic, adjusting to capital markets fluctuations as rates rose sharply — our shared experiences are really meaningful. We have a phenomenal team here at SitusAMC, and a shared commitment to our clients and each other. Our experiences along the way are the bonds that continue to strengthen our firm. 

March 2024