New 3Q 2024 Data Shows “Great Awakening” in CRE Markets

New third-quarter data indicates a “great awakening” in commercial real estate (CRE) markets, according to the ValTrends First Look Webinar, hosted by SitusAMC Insights' Peter Muoio, PhD, and Jennifer Rasmussen, PhD, on October 22. The presentation leverages proprietary data and exclusive surveys of CRE leaders to provide a forward-looking snapshot of capital and space-market trends. Here are seven notable takeaways: 
 

1. Interest Rates and CRE Mortgage Trends: The 10-year Treasury yield recently hit a peak of 4.2%, the highest since July, driven by labor market strength and concerns over fiscal deficits. Despite tighter CRE mortgage spreads over Treasuries, CMBS transaction volume in the third quarter was the second highest since early 2022, despite a slight dip in third quarter. This trend is a positive sign of recovery and demonstrates that the market is gradually finding stability after the Fed’s aggressive tightening measures. 

 
2. Institutional Preferences: CRE has regained its position as a favored investment among major asset classes, overtaking stocks, cash and bonds. Institutional investors increasingly prefer CRE, which is seen as a more resilient option amid economic uncertainty. The diversification offered by CRE investments, especially in uncertain economic climates, has reinforced its standing as a top choice for investors. 
 
3. Shifting Sentiment: For the past year, the majority of investors were in a "hold" mode, as rising interest rates made transactions more challenging. However, Muoio noted that the third quarter of 2024 showed a decrease in hold recommendations (down to 67%) with both buy and sell sentiment increasing. This shift reflects growing optimism about market stabilization and suggests that investors are becoming more willing to take action, signaling a potential increase in transaction activity. 
 
4. Cap and Discount Rate Movements: Retail has seen a notable 40-basis point compression in cap rates from the peak in the fourth quarter of 2024, followed by a 30 bps decrease for industrial and a 10 bps decline for apartments and office properties. While cap rates remain above pre-pandemic levels, these compressions indicate improved investor confidence, which could lead to more favorable pricing in the near future. The slight narrowing of the bid-ask spread further suggests that buyers and sellers are beginning to align on pricing expectations, a key component of increased deal flow. 
 
5. Capital Availability and Investor Discipline: Both equity and debt availability for CRE investments have increased significantly in recent months. This rise, coupled with narrowing bid-ask spreads, points to improving market liquidity. However, while capital is more accessible, discipline remains tight. Investors are being more selective in their capital allocations, especially in higher-risk sectors such as office and retail. As CRE markets continue to stabilize, access to capital is expected to become more consistent, helping to fuel a slow but steady rise in transaction activity. 
 
6. Performance and Forecast for Key CRE Sectors: The multifamily sector faces a challenge of oversupply, which has led to slight increases in vacancy rates. However, declining starts and completions due to high capital costs and construction expenses are expected to correct this oversupply. Vacancy rates are projected to fall below the long-term average, and rent growth should improve steadily. 
 
The office sector continues to struggle with high vacancies and sluggish rent growth. Only 30% of office loans over $100 million maturing this year were repaid on time, with the rest seeking extensions or facing defaults, according to Moody’s CMBS data. Smaller office loans performed better, with 70% repaid on time, signaling that lenders are more comfortable with smaller, less risky loans. 
 
The industrial sector has been buoyed by onshoring and near-shoring trends. Though there was a significant increase in industrial completions in recent years, this is now tapering off, with demand expected to outpace supply in the coming years. Vacancy rates are forecasted to decline, leading to stronger fundamentals in the sector by 2029. 
 
Retail remains a bright spot in the CRE market. Brick-and-mortar stores, particularly grocery and discount stores, have maintained steady demand. As construction activity in the retail space remains low, vacancies are expected to decrease, which could lead to long-awaited rent increases in the sector. 
 

7. CMBS Delinquency and Special Servicing Rates: Delinquency rates in CMBS rose by 26 basis points in September 2024, according to Trepp. All property types, except industrial, contributed to the increase, with retail experiencing the largest increase during the month of 86 basis points. This trend highlights ongoing risks in the office segment, with capital costs and weak fundamentals making it difficult for investors to meet debt obligations. Special servicing rates also climbed in September, particularly in the office market. 

Watch the webinar recording here, and 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.