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Commercial Real Estate Market Shows Signs of Revival
After a steep decline in property prices, lower borrowing costs are drawing investors back to commercial real estate, hinting that the market may be reaching its bottom.
Jordan B. & Han-Gwon Lung
September 26, 2024
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Good morning. After a steep decline in property prices, lower borrowing costs are drawing investors back to commercial real estate, hinting that the market may be reaching its bottom.
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Market Snapshot
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MARKET PULSE
Commercial Real Estate Market Shows Signs of Revival
The US commercial real estate market appears to be bottoming out, with declining borrowing costs attracting potential buyers and sellers back into the game.
The comeback: Property prices have fallen 19% since their 2022 peak, sparking renewed interest in deals. Some sellers are unloading properties at significant discounts, such as a New York office building sold for 67% less than its 2018 purchase price. The market has seen more activity recently as owners seek to cut losses and capitalize on opportunities, especially as the Federal Reserve’s rate cuts provide more clarity on valuations.
A new liquidity cycle: Transaction volumes are improving as lenders report more bids on loan and property sales. Major banks are increasingly willing to finance deals, with competition picking up—properties that received few offers a few months ago now attract multiple bidders.
➥ THE TAKEAWAY
Looking ahead: As Alex Gornik points out, buyers have been hunting for distressed assets for the last 3-4 years, but the wave of deals hasn't materialized. With around $450 billion of dry powder allocated to real estate still sitting idle, investors remain cautious despite renewed clarity. Fatigued lenders may be ready to make deals, but buyers are staying on the sidelines. The Fed's rate cut may signal deeper economic stress, and the market is in a standoff—it's only a matter of time before someone blinks.
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✍️ Editor’s Picks
Little relief: Falling interest rates are offering little solace to commercial real estate owners who borrowed heavily during low-rate periods and now face severe refinancing challenges.
Fear and Greed: The Q224 Burns + CRE Daily Fear and Greed survey results are in. Download your FREE copy to see how sentiment is shifting.
Rate cut debate: Fed’s hinted at more aggressive rate cuts ahead, though concerns about a potential recession and inflation complicate things.
Global push: Brazil's BTG Pactual acquired Miami-based Greytown Advisors, adding $1B in assets to its platform as part of a broader push into wealth management for high-net-worth clients.
Playing defense: Climate hazards may end up costing S&P Global REIT Index firms $110B by 2030, and potentially a staggering $559B by 2050.
Bubble warning: Miami tops UBS's global real estate bubble risk index, with prices up nearly 50% since 2019, as global housing markets brace for lower interest rates.
🏘️ MULTIFAMILY
Midwest milestone: Midwest multifamily markets outperform the national occupancy rate, with Detroit seeing significant growth and Milwaukee showing up as a top performer.
Top commutes: Columbus, OH, ranks as the city with the best commutes, offering the shortest, cheapest, and most vibrant travel experience, according to a Lyft survey of US cities.
Renter rights: Invitation Homes (INVH) just settled with the FTC for $48M due to misleading and deceptive tactics, including undisclosed fees and unfair evictions.
Delays ease: While fewer construction delays are reported in multifamily projects, economic uncertainty and permitting issues continue to hinder new starts, which are down 37% YoY.
🏭 Industrial
Bigger building: Overton Moore Properties is set to build a 760 KSF industrial complex in Livermore, with Lam Research pre-leasing 60%, as part of a broader plan to expand its NorCal footprint.
Logistics coup: Montea acquired a large french logistics portfolio with 17 assets from Tristan Capital Partners for nearly €150M with a 5.6% yield.
Growth spree: Prologis (PLD) acquired a 441+ KSF logistics portfolio in Raleigh-Durham's Research Triangle Park, fully leased with 32-ft clear heights, for $80.2M.
🏬 RETAIL
REIT shake-up: Inland Real Estate Income Trust (INRE), with over 7 MSF of shopping centers worth $1.4B, is undergoing a strategic review and could end up selling.
Mattress madness: Tempur Sealy (TPX) is ready to sell nearly 180 stores to Mattress Warehouse to address antitrust concerns, will retain over 2.8K stores.
Entertainment expansion: The Hollywood Park development in Inglewood, anchored by SoFi Stadium, adds four new tenants, including a restaurant and salon.
🏢 OFFICE
Towers transformed: Vanbarton Group is about to buy 77 Water St., a 26-story Manhattan office tower for $95M, to convert it into 600 rental units.
Brickell boom: Elliott Investment Management neared a $450M deal for the 701 Brickell office tower in Miami's surging commercial property market.
From riches to bargains: Related Fund Management sold the 181 KSF Hell's Kitchen office at 321 West 44th Street for $40M, a significant discount.
🏨 HOSPITALITY
Big news: Delta Corp (DAL) surged 6.77% after demerging its hospitality and real estate business into Delta Penland (DPPL), aimed at boosting capital flexibility and shareholder value.
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📈 CHART OF THE DAY
Rising insurance costs are battering commercial real estate investors. According to our recent Q224 Burns + CRE Daily Fear and Greed survey, 70% of CRE investors report double-digit (>10%) YOY growth in insurance costs.
FACT OF THE DAY
The Burj Khalifa in Dubai is not only the tallest building in the world, but its foundation alone required 110,000 tons of concrete, enough to fill 43 Olympic-sized swimming pools! This highlights the incredible engineering feats behind modern commercial real estate.
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