Resilient CRE Sectors Begin to Show Weakness: 4Q 2023 ValTrends Report

As interest rates began rising in mid-2022, commercial real estate space market fundamentals remained relatively resilient for most of the main property types, despite declines in returns, transactions and prices. But the bloom is now off the rose, according to the latest ValTrends report, SitusAMC’s quarterly analysis of important trends in the economy, CRE sectors, capital markets and the investment environment. Download our free 4Q 2023 report here. 

“To be sure, overall performance remains weak, deal activity is tepid and current valuations for most property segments are on the decline,” said Peter Muoio, PhD, Senior Director of SitusAMC Insights. "The pain will likely be felt throughout much of 2024.” 

At -7.9%, the NCREIF NPI one-year trailing return was among the worst since the Global Financial Crisis (GFC). Overall CRE deal activity, as measured by MSCI Real Assets, hit $22.6 billion in volume at the start of 2024, the slowest January since 2012.  

The industrial sector, a strong performer during the pandemic, is starting to wane, with an estimated 7% to 8% of value at risk in 2024. “Rent growth is slowing as demand weakens, absorption cools and vacancies rise,” said Jennifer Rasmussen, PhD, Vice President of SitusAMC Insights. Though still high by historical standards, fourth-quarter warehouse occupancy declined for the fifth consecutive quarter, to the lowest level in almost two years, according to Reis. 

Multifamily, the other pandemic standout, saw weaker demand in 4Q 2023, with occupancy falling to the lowest level since mid-2021, per Reis. Net absorption, though positive, was the lowest since the GFC. Effective rents fell by 1.6%, the worst lost since third quarter 2020.   

“Because of record rent growth in 2021 and 2022, apartment rents remain significantly higher than pre-pandemic levels, near 20%,” Muoio noted. “But apartment saw its largest value decrease of 2023 in the fourth quarter -- around 4.3% -- largely driven by the expansion of investment rates.” Additional value at risk in 2024 may be up to 10%. 

The report offers an outlook for the other CRE sectors as well as the economy, financial markets and availability and discipline of capital. The report integrates exclusive data  from RERC, the survey arm of SitusAMC Insights, which has been polling hundreds of institutional investors every quarter for more than 30 years. 

Download your free copy of “Bloom is Off the Rose” here.  

Our next “ValTrends First Look” webinar takes place on April 18, 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.