CRE Sees Improving Capital Availability, Price Appreciation and Returns: 2Q 2024 ValTrends Report

While commercial real estate still faces significant challenges, particularly in the office segment, green shoots are appearing, including greater capital availability, stabilizing valuations, steady price appreciation and improving returns. That’s according to the latest ValTrends report, “Shifting Tides,” SitusAMC’s quarterly analysis of important trends in the economy, CRE sectors, capital markets and the investment environment. Download our free, 28-page report for 2Q 2024 here. 

The report offers SitusAMC’s proprietary insights into the economy, financial markets, capital markets and property types, leveraging exclusive investor surveys, proprietary research, third-party data and in-depth analysis. Among the highlights: 

Capital availability is near the highest level since the Federal Reserve began rate hikes in June 2022. Underwriting standards are the most relaxed over the same time frame, according to quarterly survey respondents. Still, the capital markets are rated as historically tight. 

Valuations appear to be stabilizing, with aggregate values remaining flat and the gap between price and value narrowing amid improving investor sentiment. Bidder pools are becoming more robust, suggesting a renewed interest in property types, excluding office. For apartments, lease trade-outs have narrowed recently, with some even turning positive, easing concerns for this sector. Multifamily valuations are projected to see slight positive growth in 3Q 2024. In the retail sector, valuations are either holding steady or increasing, primarily driven by strong net operating income (NOI) growth. Office valuations remain in decline, albeit at a slower pace than observed at the end of 2023 and the beginning of 2024. 

Commercial property prices notched three consecutive months of growth through July. That’s after nearly two years of price declines, as measured by MSCI Real Assets’ National All-Property CPPI. The industrial sector saw the most appreciation, with prices rising 0.8% month over month (MoM) in July. Industrial prices have risen for 15 consecutive months, reaching a record. Retail saw modest pricing appreciation, which has been relatively steady since mid-2023. Office prices may have bottomed out, with a slight MoM increase in July for the first time in more than two years. Apartment was the lone sector to see a pricing decrease in July, dropping 0.7% MoM.  

Overall CRE performance improved in the second quarter. The NCREIF Classic NPI returns rose about 70 bps QoQ. While returns have remained negative for seven consecutive quarters, the second quarter’s returns represent the highest figure over that period. All property types except office notched positive returns in second quarter.  

CRE debt markets are starting to stabilize. Excluding the embattled office segment, performing product bond and loan spreads have been flat to slightly tighter over the last few months. Lenders are engaging in modifications and extensions, which is keeping asset managers busy. Nevertheless, many are wondering if market prices have bottomed out, which is catalyzing the growth of new funds and loans aimed at transitional real estate.  

Investor optimism for the transaction market is building following the recent rate cut by the Fed. This could reduce borrowing costs, stimulate CRE investment and enable properties in need of refinancing to obtain loans. Market participants are also encouraged that the Fed will be able to bring inflation down toward its 2% target while keeping the economy poised for a soft landing. The jump in long rates following the Fed’s easing reflected the market now discounting the potential of a recession. 

Explore full coverage of CRE markets in 2Q 2024 by downloading the ValTrends Report “Shifting Tides” here. Our next “ValTrends First Look” webinar takes place on October 22, 2024 at 2pm ET, offering a forward-looking snapshot of the quarter ahead. Register here to attend. Learn more about SitusAMC Insights’ research, analytical tools or RERC data products on our website.