Commercial real estate transaction activity is picking up, even ahead of the Federal Reserve’s interest-rate cut last month.
The U.S. commercial real estate market saw almost $60 billion in transaction volume in the second quarter, a 31% bump from the the first three months of the year, according to CoStar Group Inc. (Nasdaq: CSGP). And in a third-quarter survey of industry participants by commercial real estate data company Altus Group, the percentage who picked “deploying capital” as a primary focus over the next six months surged 11 percentage points, to 31%, from the previous quarter, when it was 20%. Meanwhile, the percentage of respondents who said they were pausing or de-risking their portfolios dropped 5 and 6 percentage points, respectively.
Art Jones, senior director of commercial real estate research at Principal Asset Management, said the past couple of years have been a capital-markets type of recession, which the industry is beginning to emerge from. But a capital-markets recession is usually driven by a weak economy, and that hasn’t been the case here.
“We haven’t had that economic distress that usually coincides with value corrections,” Jones said. “It’s the first time on record in 40 years that this has happened.”
While office buildings have started trading — frequently at basement-bargain prices compared to their last sales — there’s been a disconnect between buyer and seller pricing expectations across the industry.
Access to capital also has been a challenge, especially to obtain debt, as lenders reconsider their commercial real estate loan exposure and have pulled back from the sector. Year-over-year commercial real estate loan growth across U.S. banks slowed to 2.2% in the second quarter, compared to 2.9% the prior quarter, according to S&P Global Market Intelligence.
With the recent rate cut and the expectation that more cuts will come before year-end and into 2025, that’s giving investors more confidence to move forward on deals, Jones said.
“The dry powder in various strategies is lining up to start investing in the next year,” he said. “We think it’s going to be a slow end to 2024, but the strategies are lining up to pick up in the next year.”
Which property types will prove popular with CRE investors?
There will be disparity among sectors as the expected increased investment and deal activity plays out.
Among them, the office segment remains a sector that’ll be tricky for investors to navigate in the coming quarters and years.
Jones said for the past year to 18 months, high-net-worth individuals and family office funds have been most active in buying office properties at discounts of 50% or greater.
“There hasn’t been a lot of distress selling in core equity,” he said, adding more distress and value correction is still to come. “That repricing, and some of the interest-rate corrections, [are] going to help.”
Still, a lot of debt funds and regional banks were oversubscribed to office real estate even before the pandemic, so it’s unlikely those capital sources will be re-entering the market in a substantial way in the near term, Jones said.
Conversely, despite some of the overbuilding that’s occurred in both apartments and industrial, those are two property types high on investors’ radar. That’s also because of broader economic themes — a continued national undersupply of housing and e-commerce demand that’s expected to remain strong for the foreseeable future, Jones said.
Apartment deliveries are up 9% from 2023 and 30% from 2022, according to Principal, but the wave of new supply is beginning to slow as fewer projects break ground.
New industrial construction also has slowed, having fallen 55% below the market’s 2022 peak, according to Principal. Those who track the industry say the slowdown in apartment and industrial will allow demand within those property types to recover and — especially in residential — could even create a shortage in a couple of years.
Other, somewhat more niche sectors, drawing investors’ interest include data centers — although that market is highly competitive and expensive, Jones said — industrial outdoor storage and single-family rentals.
Mark Rose, CEO of Avison Young, said in a recent interview with The Business Journals in the short term, property types that have been attractive — grocery-anchored retail centers, Class A office space, outdoor storage, cold storage, self-storage and data centers — will continue to be popular with investors. But even more challenged properties, such as regional malls or office buildings that need to be repositioned, will start to make more sense for investors to pursue.
“It’s like anything else … [if] everybody is piling into the same assets, it never ends well,” Rose said. “A combination of quantitative and qualitative returns is something we still need to focus on. Everything that was working is going to continue to work at lower financing costs. Everything that hasn’t been working — in particular, the office sector — you have the fundamentals starting to catch up incrementally.”
Investors today know the sectors they want to deploy capital into and, with the recent rate cuts and more economic certainty, can begin formulating strategies that will be deployed in the coming quarters.
“Those two things are really going to allow them to figure out where pricing is,” Jones said. “That’s been lacking in the past two years.”
Source: “CRE investors prepare for a busier year of buying, selling in 2025”
