CRE Market Shows ‘Seeds’ of Recovery: ValTrends First Look Webinar

Prospects for commercial real estate (CRE) may be brightening, amid improving trends in interest rates, investor sentiment, capital availability and a narrowing bid-ask spread, according to the ValTrends First Look webinar held on July 23. Hosted by the SitusAMC Insights leadership team of Peter Muoio, PhD, and Jennifer Rasmussen, PhD, the webinar leverages proprietary data and exclusive surveys of CRE leaders to provide a forward-looking snapshot of capital and space-market trends.  

“We’re seeing some improvement in what investors think about CRE generally, some lowering of interest rates, some easing of capital and we’re starting to some of the disconnect between bid and ask begin to close,” Muoio said. “These are seeds of potentially what could be a somewhat stronger second half of the year and certainly 2025 for the commercial real estate sector.” 

Here are the key webinar highlights: 

The underlying economic environment remains quite good. While GDP and the labor markets have seen some cooling, growth continues. CRE mortgage rates have been trending down and stand about 50bp lower than the May high at around 4.2% range. That’s following the June employment report, which showed unemployment at 4.1% and downward revisions in job growth for the previous two months; and Consumer Price Index, which showed continued slowing of inflation year over year. “This (data) reinforced initial optimism about rate cuts coming this year,” Muoio said.   

The investment and lending landscape remains bumpy. Investors still rank equities, bonds and cash above CRE, but sentiment has improved from 2023. Meanwhile, equity and debt capital availability and discipline have improved but remain tight. Among bank lenders, small banks are the active ones, with exposure up 0.4% in April and 6% over the past year, while large banks have cut their CRE exposure by 2.1% over the past year. Deal volume remains tepid, with transactions in May falling to their lowest level in this downcycle. Investors overwhelmingly favor holding assets rather than buying or selling, but the sentiment toward buying is beginning to rise. 

The disconnect on CRE prices has gummed up the transaction market. A recent SitusAMC analysis found the bid-ask has widened to historical highs for apartment, office and industrial properties. Industrial has dramatically gone from a negative spread to a positive one, while apartment and office have both grown significantly wider. While the spread for all three segments remains very wide, it has begun to narrow. 

Only two-thirds of CMBS loans that have reached maturity have been paid off. SitusAMC recently conducted a proprietary analysis of the entire universe of CMBS loans since 2015. Of the loans that have reached maturity, fully one-third have not paid off. Some 11% outright defaulted, 8% have been extended, and the remainder are in either forbearance or are reported to have matured but still have a current balance. This indicates that a lot of subsurface “workouts” are occurring. While more than 80% of apartment and industrial loans paid off, just 60% of office and half of hotel loans did. Office has the highest default rate at 16.2%.   

If you missed the First Look webinar, you may register to watch the recording here. Download a copy of the slide deck here. Our 28-page ValTrends report will come out at the end of the quarter. Click here to be notified as soon as the report is available, and we'll send you a link to download it for free. For more information on SitusAMC Insight’s research, analytical tools, or data products, visit our website.