At the close of each quarter, the LightBox CRE Market Advisory Council, a broad-based cross section of leaders and industry experts from firms like Cushman & Wakefield, NAI Global, Marcus & Millichap, BFO and Manulife share their invaluable perspectives and insights on recent market developments, top challenges, emerging opportunities, and the near-term forecast. In the first of this two-part series, we share where council members are seeing growing demand for debt capital and investment interest and their expectations for the near-term at this critical stage in the market’s recovery.
Based on the latest survey responses from the LightBox CRE Market Advisory Council, CRE market conditions in Q3 2024 averaged 70 on a scale from 1 (worsening) to 100 (improving) as the market responded to the long-awaited onset of the interest rate cutting cycle. Council members also observed new pricing and loan terms as rates start to come down, and a growing intention on the part of investors as capital moves back into play.
“The long-awaited shift is finally underway. Lower interest rates are drawing lenders back to the table, and the gap between buyer and seller expectations is beginning to close. These are encouraging signs that recovery is taking hold with positive changes on the horizon.”
– Matthew Osborne, Executive Vice President & Chief Credit Officer at Eastern Bank
Banks Reinvigorate Lending
For much of this year, the uncertainty surrounding when the Fed would lower rates gave lenders reason to hold tight on the reins of new originations. With two rate cuts now on the books—and more likely on the way, banks are slowly starting to re-engage selectively for quality cash-flowing assets, and are competing with private equity lenders, life companies, and CMBS issuers that stepped in to fill the debt capital vacuum. The new lending environment is good news for any investors looking to purchase stabilized assets or refinance a maturing loan given the competition among lending sources. The latest forecast from the Mortgage Bankers Association (MBA) predicts that total commercial and multifamily mortgage borrowing levels will reach $539 billion in 2024, a 26% increase above 2023 levels, and then another 23% increase in 2025 in response to the moderation in interest rates and the significant volume of loans set to mature in the coming quarters.
“We’ve been stuck in price discovery for almost two years. The narrowing of loan spreads and the gap between buyers and sellers expectations is a very promising development. The return of banks to lending for high-quality, cash-flowing properties, along with increased activity from agency lenders, signals improved liquidity and more opportunities for transactions in the CRE market.”
– Bryan Doyle, Managing Director, Capital Markets at CBRE
Q4 Growth is Expected by an Overwhelming 91% of Council
The latest round of sentiment surveys conducted by organizations like NAIOP, CREFC, and SIOR are all pointing to new optimism as borrowing costs ease for the first time in more than four years. October’s deal volume was more than double September’s strong deal volume continued in October, and this higher pace of transactions will encourage more stabilization in property pricing (and even increases in values in some cases) that will add momentum to deals closing by year-end. So, it is not surprising that a significant 91% of CRE Market Advisory Council members expect higher property transaction levels in Q4 compared to Q3. Even more reassuring is that no member is expecting a decline.
Expectations for CRE Property Transaction Volume in Q4 2024
Measured Optimism for a Solid Year-End Finish
While short-term borrowers may hold off and wait for more interest rate cuts, long-term investors are moving in quickly to jump on opportunities while liquidity is still constrained. The speed with which investors with access to debt or equity capital reinvigorates investment activity will play a significant role in how quickly dealmaking ramps up in coming quarters, as well as the path of future interest rate cuts by the Fed. As this new growth cycle for CRE gets underway, the strongest point in favor of future CRE transactions growth is the sheer volume of capital raised to take advantage of opportunistic investments. Eventually this capital will be deployed as new properties come onto the selling block and as the math behind deals pencils out better than it has in the recent past.
“At this point, it would take something highly idiosyncratic to derail my positive outlook for CRE capital markets. CRE returns have already swung back into positive territory after the Fed stopped raising rates last year, holding true to form. With no permanent change in the CRE economy, there is no reason to expect that the lower rates would not continue to boost the CRE market—liquidity, transaction volume, valuations, appreciation returns, and total returns should all improve as the monetary policy environment continues to shift.”
– Ryan Severino, Chief Economist at BGO
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