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LightBox CRE Monthly Commentary: The Push Continues for CRE Market

Manus Clancy
April 30, 2024 3 mins

Higher CPI and PPI Delay Rate Cuts but Big Deals Provide Signs of Hope

Back in December, many market analysts were expecting that the Fed would have delivered at least one rate cut by now and that the beginning of a CRE rebound would be well on its way.

The data coming out of the U.S. economy since the beginning of the year put several wrinkles in those expectations.

Late last year, euphoric analysts followed up benign CPI and PPI numbers with breathless – but never realistic – calls for as many as six rate cuts in 2024.

Since then, CPI and PPI have reversed course, and some now say the next Fed move could be higher. Even the most optimistic prognosticators are calling for only one rate cut and not until the second half of the year.

April was more of the same with CPI and PPI both coming in higher than expected. The result was upward pressure on interest rates with the yield on the 10-year Treasury moving up more than 30 basis points last month. Not exactly the recipe for a buoyant CRE recovery.

In addition, the “chatter” in the financial press was unrelentingly negative and reporters and social warriors reminded us repeatedly of distressed offices selling at huge discounts.

With the Fed in no hurry to cut rates; higher long Treasury yields; and bearish CRE headlines, finding a CRE bull was – as the old saw goes – like finding an atheist in a foxhole.

Yet cutting through the noise, there were some positive developments that CRE experts can cling to.

Several big portfolio deals were announced last month, providing evidence that some buyers are willing to deploy capital in big numbers.

Late last month, KKR paid $1.6 billion for a 19-property student housing portfolio. In addition, Blackstone paid $10 billion to acquire Apartment Income REIT Corp – aka AIR Communities.

Adding more positive news, Bloomberg reported that CMBS lending is up 170% from the same period in 2023. This reveals that the market remains “open for business” (unlike 2008-2010) and that not all borrowers are waiting for rates to drop to get deals done.

Positive Signs for Office?

Even in the beleaguered office segment, deal velocity has been accelerating. This week, Hillword acquired a three-property office complex in Irving, TX.

To be sure, none of the recent office sales have provided any reason for bullishness in that sector. Often the sales are at prices that are 50% or more below sales prices from five or 10 years ago.  But several of these sales are now happening each week, which indicates owners have capitulated, throwing in the towel either due to unsustainable debt or bleak prospects for turnaround.

While that sounds awful – and it is for the current owner – capitulation is the first step in a bottom forming and reveals that price discovery is taking place. This doesn’t mean we will see a near-term bounce in office values, but it does mean that more offices should trade as buyers and sellers coalesce around true value.

The rebound in transactions was underscored by the Lightbox CRE Activity Index in Q1. This Index – which measures the rate of property listings, environmental phase 1 reports orders, and appraisal orders – showed an increase in CRE transaction velocity in Q1 2024.

That Index is still far below the 2021 peak and is still below the Q1 2023 level, but the uptick last quarter is a hopeful sign for those in the CRE industry that make a living off transaction volume.

For those in need of a more optimistic tonic, here is one more. The last two CRE crises – 1990 and 2008 – saw the market closed for several years. Virtually no lending took place during those years, bank failures were in the hundreds, and liquidity, like Elvis, had left the building. Even though the current CRE downturn is now approaching two years, at no point has lending stopped and only a handful of banks have failed. This is evidence that the markets have continued to function in spite of the noise and as long as that continues, the CRE market can avoid comparisons to 1990 and 2008.

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