Industry experts look at what’s involved in a comeback in capital markets and deal volume.
Bottom of thawing iced dollar sign with cash


Is this as good as it gets? Heading into the second quarter of 2024, commercial real estate professionals are holding out for an answer to that question as they wait for interest rate cuts and ponder whether to greenlight transactions and seek out business opportunities that have been on hold for the last year or more. Many commercial real estate leaders are in limbo, waiting on action by the Federal Reserve.

Fed officials want to see a continuation of the good inflation data they’ve recently seen before they cut interest rates, said Fed Chair Jerome Powell at a press conference in late January. A Fed governor, Christopher Waller, made a similar point in a speech at the Brookings Institution in January. After describing recent improvement, he said, “For a macroeconomist, this is almost as good as it gets. But will it last?”

“Investors and other commercial real estate participants are patiently waiting for the Fed’s direction on short-term rates so there can be stability in borrowing costs,” says Brent Raindl, Dallas Region chairman of PlainsCapital Bank. “While debt is only one component of the capital stack, it does have an impact on new projects, with the amount of equity required and pricing of existing CRE assets. Significant capital in both public and private sectors has been allocated to CRE that investors are patiently waiting to invest. Once the Fed begins to cut, I think you’ll see an increase in CRE transactions.”

Keeping Data in Perspective

When evaluating the data, perspective is important, says Lawrence Yun, chief economist for the National Association of REALTORS®. Data from investment research firm MSCI shows the volume of commercial real estate transactions declined by 51% in 2023 from 2022. But relative to the average annual pace of deal volume seen from 2015 to 2019, volume was down by only 32%.

“That data on transactions is showing quite a sizable decline,” Yun says. But a comparison between 2023 and 2022 requires a broader context.

A broker who shares that view is Dan Spiegel, SIOR, senior vice president and managing director at Coldwell Banker Commercial. “2022 was a very strong year for commercial real estate. At least for Coldwell Banker Commercial, we were at a 10-year high in 2022. The industry’s dropping 51% in 2023, while dramatic, is coming off a very high point of comparison.”

Factoring in Inflation

The Fed previously said three rate cuts might be coming in 2024. “It depends on the path of inflation, and I think inflation will be much calmer,” Yun says. “With the interest rate for commercial real estate having come down 1% toward the end of last year, that would imply more than three rate cuts in the market.

“One key determinant of the path of inflation is apartment rents,” Yun adds. “Extensive apartment construction in the past two years created an oversupply. With the rent component of the data being less volatile in the upcoming months, that will bring overall inflation down.”

Yun anticipates a best-case scenario where decelerating inflation gives the Fed a reason to cut interest rates more deeply, more than three times. “And that means cap rates can begin to come down. So, property owners will no longer see depreciation in their values.”

For Raindl, the best case would be the Fed succeeding in its dual mandate and accomplishing an economic “soft landing” where conditions are ripe for growth. “If the Fed can navigate this mandate and provide some clarity on where short-term rates are moving, CRE participants would have the present and future stability they need,” Raindl says.

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Shape of Deals to Come

Besides inflation, other factors that may improve capital markets and deal volume include:

The need for land for multifamily and other housing: Spiegel is seeing a “fair amount of activity in land acquisition, particularly for building housing,” he says. “We concluded a number of transactions at the end of last year and anticipate there will be more, early this year, for builders of single-family homes, single-family rentals and multifamily.”

More community bank lending: “Community banks were in a more uncertain state last year,” Yun says. “As interest rates go down, it’s going to help community banks perform a little better in terms of their overall balance sheet outlook.” That should increase lending.

Job creation: Office and multifamily will be challenged by lower demand and oversupply. But the other sectors need job creation to recover, Yun says. “I think Florida, Georgia, the Carolinas and Texas— along with some of the Mountain time zone regions of Colorado, Utah, Nevada and Arizona—will be outperformers in terms of net absorption. Commercial real estate prices will hold on better there than in other areas.”

How to Spot Opportunity

Spiegel says he measures success in any market by looking at market share and market conditions. For example, he checked Coldwell Banker Commercial’s market share rankings for Q3 2023 and a year earlier, when the market was robust. The rankings were close. “That means irrespective of the market conditions, we’re retaining our share of the market,” he explains. “Brokerages and brokerage leaders want to make sure they’re getting their fair share of the market, whether the market is frothy or frozen.”

Opportunity was scarce last year, especially on the transaction side, because of bank lending constraints, Yun says. “But if bank lending loosens up a bit, be prepared, whether representing buyers or sellers. Sometimes sellers resist cutting prices or think they can get the property prices of two years ago. We are not at a 3% or 4% interest rate environment, so property won’t get that valuation. There have to be some price concessions.”

If property owners struggle with refinancing their properties, “those properties will go back to the bank,” Spiegel says. “Investors will buy them, resetting the basis for those assets, and the properties will go back into the market.”

Brokerages are seeing signs of positive rental absorption in retail, industrial and apartments, Yun says. “For people who are involved in leasing, business activity will continue, possibly with further improvement this year.”

Spiegel suggests branching into new concepts, such as lifestyle trends. “I have a number of brokers around the country who are engaged with operators of pickleball,” he says. “That’s a whole new business opportunity.”


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