CRE Index Shows Market Ready to Move

Is the torrent of hardship that has rocked the commercial real estate sector becoming a distant memory? Perhaps not immediately, but there are signs that the tide is changing direction and leaving behind the pitfalls of the past.

But the sector is headed for a strong September and fourth quarter after the Fed announced its rate cut plans, according to Lightbox’s monthly CRE activity index for August, which measures changes in property listings, appraisals and environmental due diligence.

The index fell to 89.9 in August, 2.5 points lower than in July, interrupting a five-month trend of steady but modest increases. “The volume of properties listed for sale declined moderately, as expected,” Lightbox reported.

The report, however, does not see the decline as concerning or surprising. “More telling (and more promising) is that the August index was nine points higher than the same period last year, when it was at 80.9. This year-over-year increase reflects strong improvements in all three components of the index, outperforming last year’s tepid market activity,” the report said.

He expected the index to rise steadily as the first round of rate cuts is absorbed and commercial real estate investments and lending increase, indicating that opportunistic investors are already looking for active assets.

“Real estate transaction activity has increased every month since March and despite a slight (and expected) dip in March, the buyer base is broadening, interest in evaluating opportunities is increasing and recent acquisitions have surfaced across all property types and geographies,” the report said. “The signs of a market mobilizing to meet what could be a dramatic asset transfer are clear. Recent reductions in transactions span all asset classes and geographies.”

The report notes an increase in the number of confidentiality agreements per property, particularly in the multi-unit and retail sectors. It also notes pent-up demand for performing properties. Even in power, the report says asset transfers have already begun – some from forced sales, others from institutional investors looking to exit and still others from opportunistic private equity buyers.

Distressed real estate transactions remain low, though they are increasing. “With each passing month, the reality of the challenges associated with loan maturity becomes more apparent,” he noted. For homeowners and lenders, that means deciding whether to refinance with a large equity injection, seek a loan extension or force a sale. Foreclosures remain low.

At the same time, traditional commercial real estate lenders are keen to minimise their exposure to risk and remain cautious about making new loans. “Private equity debt lenders and life insurance companies are stepping up and stepping in to fill the bank lending gap.”

Once the rate cut phase kicks in and investors sense the window of opportunity is open, they will begin to deploy capital quickly, if the current recovery follows past patterns, the report said.

Still, the Fed acknowledges that dark clouds could cloud the near-term outlook. A slowdown in the labor market could point to a recession. Retail sales figures indicate that consumer spending could lose momentum. Those are issues the Fed will be watching for, along with rising prices, an increase in layoffs or a decline in job openings, the report notes.

In the absence of such trends, the index reflects “the underlying strength and resilience of the market, built on the foundations of growing momentum, all amid unpredictable jolts of volatility in the broader economy,” the report said.