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Next year could be an opportune time for brokers to diversify into commercial real estate lending, according to a non-bank lender, with conditions aligning to propel new momentum in the market.
Pallas Capital is expecting loans for residential development projects to be the source of new broker business in 2025, particularly if interest rates begin to drop during the next calendar year.
Dan Gallen (pictured), Pallas Capital’s co-founder and chief investment officer, said housing demand continues to outstrip supply, and any interest rates cut next year could support more development deals.
“High interest rates have limited affordability and reduced the ability of buyers to secure home loans, suppressing demand for new stock and leading to reduced new project starts and low vacancy rates,” Gallen told Australian Broker.
“If rates ease in 2025, this could unlock buyer demand as renters look to become owner-occupiers, supported by more accessible home loans at larger quantum levels. This shift would stimulate demand, providing developers with the confidence to break ground on projects,” he said.
There has also been a stabilisation in building costs, with Gallen saying developers have come to terms with a “new normal”, and that these costs are now factored into well-prepared feasibilities.
“Developers have adapted, incorporating these higher costs into their financial models and recognising the increased equity requirements needed to launch new projects,” he said.
Pallas Capital is also expecting more activity in the repositioning of commercial properties.
“This includes upgrading office spaces or mixed-use developments for an increased focus on quality, amenity and sustainability, to attract higher quality tenants.”
In addition the industrial sector also remains strong, according to the non-bank lender, a trend that is in part being driven by ongoing demand for logistics, warehouses and last-mile delivery.
Pallas Capital believes a positive impact will be felt as soon as the RBA does move to cut rates.
“The impact and opportunities will quickly follow as developers, investors and businesses capitalise on improved affordability and favourable lending terms, driving increased activity across the commercial real estate sector,” Gallen said.
Brokers active in residential development deals should talk to clients about finance that addresses current market challenges, Gallen said, such as lower pre-sales and higher equity requirements.
For a commercial property repositioning, Pallas Capital recommends brokers add value with financing options that align with client repositioning timelines and project return on investment.
With the residential market facing slowing sales activity, Gallen said diversifying income sources makes sense, and brokers can upskill to capitalise on these commercial broking opportunities.
“Commercial loans tend to be larger, offering the potential for higher commissions,” he said.
“They also come with added complexity, requiring brokers to have a deep understanding of what to look for in a deal, the nuances of bank and non-bank lender appetites, and insight into which lenders in the market offer the most competitive terms and streamlined processes.”
Gallen said for brokers willing to invest in learning and the intricacies of commercial finance, it provides a pathway to “future-proofing businesses” as they gain access to a broader client base.
“Especially given the fact that commercial real estate continues to attract investor interest across a range of asset classes including office, retail and industrial,” he said.
