Navigating the Shifting CRE Landscape: 7 Trends to Watch

As the commercial real estate (CRE) market stabilizes, pricing trends and investment strategies are quickly evolving. On February 26, SitusAMC’s Real Estate Valuation Services (REVS) team hosted a webinar, “Interpreting the Data: Current Valuation Trends and State of the CRE Market,” taking a deep dive into trends affecting values and returns within NCREIF’s NFI-ODCE index. The webinar featured Brian Velky, Global Head of REVS, and Managing Directors Andrew Sabatini and Dane Anderson. Here are seven highlights: 

1. The Market is Stabilizing 

The CRE market is shifting from a period of decline into one of value stabilization. Concerns about price discovery have abated, as transaction activity levels in 2024 have reached those seen during the recent market peak in 2021. This suggests a healthy transaction and lending environment, with residential and industrial sectors accounting for 70% to 75% of transactions. While certain market segments face ongoing adjustments, the broader outlook suggests a steadying market, rather than a continued downturn. 

2. Tight Spreads Between ODCE Cap Rates and Treasury Yields 

An emerging concern is the narrowing spread between ODCE cap rates and the 10-year Treasury yield. Historically, ODCE cap rates have maintained a 20- to 25-basis point spread over Treasuries, but recent data indicates a much tighter gap. This compression could limit the risk and liquidity premiums that investors expect, raising questions about the sustainability of current valuations. 

3. Price Discovery is Improving as Transaction Volume Increases 

The second half of 2024 saw $9 billion in sales activity within the ODCE universe alone, providing critical data for price discovery. A comparison of sale prices to last appraised values revealed minimal variance across most asset classes. Notably, apartment and industrial properties exhibited stability, while office properties continued to trade at a discount. Importantly, the narrowing gap between price and value is being driven by prices rising to meet appraisals, rather than the other way around. 

4. Historical Comparisons Reveal a Unique Market Environment 

Looking at past downturns, this cycle presents distinct characteristics. The 1990s CRE decline lasted 25 quarters with a 40% value drop, while the Global Financial Crisis (GFC) decline lasted nine quarters with a 30% drop. The current downturn has spanned 10 quarters with a 20% decline thus far. What makes this cycle unique is that the 10-year Treasury yield has expanded by 160 basis points—contrary to past cycles, where it typically contracted. This factor is shaping underwriting expectations, with many investors anticipating a long-term Treasury rate of around 3.5%. 

5. Industrial and Apartment Sectors Show Strength 

The second half of 2024 saw pent-up demand driving competition in the apartment and industrial sectors. Apartments traded at a 23% discount to peak values (compared to a 17% index decline), while industrial properties rebounded significantly, with values down only 7% from peak levels. Despite some rent softening in Southern California, the long-term outlook for industrial remains strong, with expectations for rent growth rebounding to 4% to 5% annually. 

6. Office Struggles with a Bifurcated Market 

Office assets continue to face significant headwinds, with a persistent gap between price and value. The sector is experiencing a bifurcation similar to what occurred in regional malls in the past, in which high-quality assets retain occupancy while commodity office space struggles. A deeper analysis of ODCE office properties by age revealed that newer, highly amenitized buildings are maintaining occupancy, while older properties are seeing vacancies rise. Although there are early signs of a back-to-office movement, leasing momentum must translate into tangible improvements in asset values. 

7. NOI Growth Trends Point to Long-Term Stability 

While net operating income (NOI) growth has decelerated from the post-COVID surge, it remains on a strong long-term trajectory. Industrial and residential sectors are expected to see sustained NOI growth. Interestingly, retail was the only sector to post positive NOI growth in Q4 2024, thanks to rising occupancies and investor interest in larger lifestyle center deals. However, investors should be mindful of short-term oversupply issues in certain apartment markets such as Atlanta, Austin, and Charlotte, which could take one to two years to resolve. 

Looking Ahead: A Stable but Differentiated Market 

The overarching theme of the webinar was that CRE is entering a period of stability, but differentiation among asset classes and management strategies will be key. NOI growth and disciplined asset management will drive performance, rather than cap rate compression. Over the next three years, the expected unlevered total return is projected at 6% to 7%, with approximately 5% from income return and 1% to 2% from appreciation. 

For finance professionals navigating CRE investments, the message is clear: while overall market conditions have stabilized, strategic asset selection and proactive management will be critical for achieving outperformance in this evolving landscape. 
 
Watch a recording of the webinar or download the slides here. For more information on SitusAMC’s Real Estate Valuation Services, visit our website.