As the protracted downturn in commercial real estate (CRE) drags on, attendees came to the LightBox PRISM 2024 conference eager to hear how market experts would answer the question: “When will the market see a much-anticipated rebound in lending and investment?” Now in its 8th year, the PRISM conference brings together the largest environmental due diligence firms, risk managers at financial institutions, chief appraisers, and field appraisers from across the country to network and learn about the latest technology, market forces and opportunities shaping CRE.
Speaking to the PRISM attendees on Day Two, Manus Clancy, Head of Data Strategy at LightBox, observed that despite the exceedingly negative press reports of late, the buzz at PRISM was much more nuanced. “To be sure, no one is popping corks over the performance of CRE thus far in 2024,” he said. “But it was interesting to hear that many of the attendees are seeing an uptick in their business and that distress is still limited for most of the major asset classes, other than office.”
In his presentation titled, “Market Trends Through the LightBox Lens,” Clancy’s presentation underscored those nuances and gave the audience a thorough comparison of the current downturn to its predecessors. While conceding that higher interest rates and inflated operating costs are taking a big bite out of valuations and deterring new lending and investment, Clancy highlighted several reasons that attendees have cause to be optimistic about the near-term forecast. Anyone looking for glass-half-full nuggets should consider these critical perspectives:
- It’s a Slowdown not a Shutdown
Unlike past CRE crises— 1990 and 2008 specifically— the market has not shut down. In those two CRE recessions, lending all but dried up for two years. “The fact that lending has continued through the downturn has been encouraging” noted Clancy. “Said another way, and likening the market lull to an illness, the less serious the infection, the quicker and more complete the recovery.”
- Distress Has Been Limited
Despite headlines about distress, especially for large trophy office assets, distress thus far has been limited and value declines are due mostly to higher interest and cap rates. Other than multifamily, underwriting practices in this downturn have been much more disciplined than in the previous 1990 and 2008 run ups. The percentage of delinquent loans averages 4.7% for the current month, with the highest in mixed use (10.8%) and office (6.4%) and the lowest in industrial (0.5%) and multifamily (2.2%). Clancy acknowledged that these percentages could rise, and that “It could be as bad as 1990 or 2008 in terms of the repricing in office,” but at least for now, delinquencies are trending much lower than in past downturns. Moreover, Clancy noted that risk spreads for BBB-rated CMBS bonds are tightening and are 300 basis points tighter now than they were in late 2023. “This is not exactly a sign of panic among investors,” he noted, since narrower spreads indicate investor confidence.
- Capital Waiting to Be Deployed is Abundant
Clancy shared the encouraging news that large portfolio deals in the multifamily, student housing, and industrial segments are a positive sign that investors are willing to deploy capital at the right price. Even in the deeply distressed office market, signs of life are occurring, he noted. “Sales have taken place— albeit at bargain basement prices. The fact that properties are selling is evidence that a bottom is starting to form in many markets including LA, San Francisco, New York, Chicago, Portland, and other markets.”
- Modest Signs of Life are Surfacing in the Data
Clancy explained that CMBS issuance was up 170% in Q1 2024 from Q1 2023 and that the Lightbox CRE Activity Index for Q1 2024 showed a healthy uptick from Q4 2023. The Index— which will soon be available as a monthly index— tracks fluctuations in the volume of environmental due diligence (measured by Phase I environmental site assessments or ESAs), commercial property listings, and valuations, drawing from real-time data across various LightBox platforms to develop a composite measure of changes in CRE velocity. In a promising twist, Clancy highlighted April data that reflected a similar uptick to Q1, which could be an early sign of a busier Q2. Clancy predicted that “Once lower interest rates arrive, the transactions market could open wide as investors move capital into action.”
LightBox CRE Activity Index (base Q1 2021=100)
- Time Heals
Clancy noted that it’s been two years since CPI peaked and more than 14 months since three U.S. banks (SVB, Signature and First Republic) experienced significant failures. “We’ve had no pivotal events that characterized the 2008 Great Financial Crisis where key institutions faced liquidity issues and significant losses,” Clancy remarked optimistically.
Moreover, while the term “doom loop” has become a trope for many CRE reporters, the tenor was more hopeful than downbeat for many PRISM audience members— along with Clancy—who is renowned for his measured assessment and thoughtful analysis of the CRE finance market.
Stay tuned for our upcoming blog highlighting the latest cyclical and structural trends impacting the CRE market.
