Welcome to the CRE News Digest from First American Title NCS, where we explore the biggest stories in commercial real estate. As a legacy brand working in CRE for more than 120 years, First American keenly knows the market and the forces that are impacting our clients’ businesses.

Big Picture: The Lending Landscape

New data from the Federal Reserve is shedding light on the current state of commercial real estate lending and the CRE market at large. According to figures released in October, total CRE loan volume held by banks declined in the first half of the month. In Q2 2023, outstanding debt experienced its lowest quarter-over-quarter growth since 2014. These patterns indicate that banks are exercising caution and increasingly slowing down CRE lending in the face of ongoing economic uncertainty. The lending landscape is unlikely to normalize anytime soon, as refinancing in the face of high interest rates will be challenging moving into 2024.

Industry leaders are keeping a close eye on regional banks, which remain the primary lenders across the CRE market. To mitigate lending risk, experts are recommending a diverse array of solutions, including federal regulation and an increased focus on private lending.

 According to Kevin O’Leary, founder of O'Leary Funds and O'Leary Ventures, lawmakers should be pressuring the FDIC to institute a $100 million guarantee for non-interest-bearing accounts. Meanwhile, private lenders are experiencing a boom in business; Alex Horn, managing partner & founder at private lender BridgeInvest, shared with Commercial Property Executive that their 2023 deal volume has “already [surpassed] the volume of deals reviewed in all of 2022.”

 Cautious optimism remains the name of the CRE game. CREFC’s Q3 2023 Board of Governors Sentiment survey reveals that while 58% of respondents maintain a negative outlook, overall sentiment rose 5% from Q2.

 State of the Sector: Retail

The combination of demand growth and limited additional supply is creating a tight market for retail space. Demand for retail space has grown for 10 consecutive quarters and, according to CoStar, available retail space has hit its lowest point since national tracking began in 2006. Rent growth is rallying as supply becomes increasingly limited, and a lack of new construction starts indicates that these trends will continue in the near term. To gain a clearer picture of the state of retail and forecast where the sector might be headed, First American Senior CRE Economist Xander Snyder analyzed recent consumer spending patterns. Snyder highlighted that while real retail spending declined among consumers for much of this year, real retail spending at experiential locations, where customers must physically visit to receive the service being purchased, has continued to increase. Limited supply of available space and slowing construction starts will insulate vacancy rates from increasing in the near future.

 Innovation: The Rush to Regulate AI

In late October, the Biden Administration announced an executive order to ensure “safe, secure, and trustworthy development and use of artificial intelligence.” The order’s effects extend beyond the tech sector into the commercial real estate industry. In the coming months, federal agencies are expected to release guidance on the use of AI in tenant screening solutions to avoid violating the Fair Housing and Fair Credit Reporting Acts. Generative AI is already taking off in CRE, and stakeholders from proptech startups to major firms are adopting new solutions and internal regulation policies. As the AI space continues to expand, the CRE industry is evolving in step.