The end of real estate finance?

If commercial property becomes a service industry, asset-level finance will become less relevant.

To round off a panel discussion on real estate debt at yesterday’s PERE Europe event, hosted by Real Estate Capital’s sister title in London, panellists were asked what they see as the main threat to the property lending market.

Rising interest rates, geopolitical risk and ballooning logistics values were among the responses. But one answer stood out: Jeffrey Rubinoff, partner at law firm White & Case, prefacing it by calling it a “wacky” response, replied: “Relevancy”.

His point was that speakers on every panel at PERE Europe had talked about commercial real estate evolving from an asset to a service. Disruption in the occupational market is everywhere, with flexible workspace and places to live increasingly seen as the industry’s future.

If this trend continues long-term, Rubinoff argued, and if ownership of real estate becomes an operating activity, rather than an asset management activity, the logical conclusion is that there ceases to be a need for real estate finance because lenders are essentially backing operating businesses.

That sort of activity sits in a different part of the banking system, with loans to operating business underwritten and priced differently from a traditional real estate finance facility. The fact the operator provides its service from within a piece of real estate ceases to be the defining factor as to how it is financed.

So, are we witnessing the beginning of the end of real estate finance?

That would be a rather dramatic conclusion. But there is a serious point that real estate lenders need to consider – property owners are keenly aware the way they need to run their assets is changing, but most real estate lenders are yet to get to grips with the implications for structuring loans.

Just as owners cannot rely on traditional leasing models, debt providers will find standard underwriting – which focuses on metrics that become less relevant to the new generation of occupiers’ business models – will also become outdated. It is difficult at this stage to envisage how the lending industry responds, but it is a conundrum which needs to be tackled.

Of course, there are a lot of ‘ifs’ here. A future in which we all work in shared spaces with yoga classes on demand and running tracks on the roof is far from certain. The strength of the flexible working and living model will be tested in the next downturn.

Indeed, speaking on a panel at PERE Europe, EQT Real Estate head Robert Rackind argued part of the demand for co-working space was the current lack of office supply. “If we move into oversupply,” he said, “the co-working phenomenon may die out a bit.”

However, most agreed disruption is here to stay and Rackind said that offering occupiers flexibility is key. Even if we are not all co-working by 2030, the fundamental relationship between owner and occupier will change.

The end of real estate finance is not nigh just yet. But unless property lenders work out how to underwrite emerging trends in occupancy, the suggestion they may lose relevancy is not as wacky as Rubinoff suggested.

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