MARKET OVERVIEW
The Commercial Real Estate (CRE) market had almost $60 billion in transaction volume in Q2, a 31% bump over the previous quarter, according to CoStar data. All major sectors took part in the improvement. However, Q3 results may totter back toward Q1 levels, due to anticipation over the end of the Federal Reserve’s (the Fed) restrictive cycle. A 25 basis points (bp) interest rate cut is widely expected during the Fed’s September 18 meeting, but a 50 bp drop is not out of the question – especially given the political implications of a rate reduction at the Fed’s November 7 meeting, just days after the country’s presidential Election Day. According to a recent Bisnow survey, many industry players are cautiously optimistic and perched for that first cut, with one referring to it as a catalyst and another predicting that “the capital floodgates will open back up.”
Markets were primarily motivated by supportive, albeit softened, fundamentals. According to the National Association of REALTORS®*, both Multifamily and Industrial rents and vacancies were hurt by the lingering swell of deliveries, but Apartment net absorption was nearly 2.5 times better than a year ago. Industrial rent growth also remained highly attractive at 4.1%. Retail, on the other hand, had a dearth of new space, which kept vacancies extremely low. However, economic caution weighed on Retail rents. In the Office sector, although negative net absorption and downsizing rates stabilized, vacancies* crept up to 13.8%. Owner-User transactions again boosted activity, as did further price slides. Most of the CCRSI price index’s 11.9% decline in June was attributable to Office. The Mortgage Bankers Association reported that office properties were the only category with worsened delinquency in Q2. Distress transactions remained a small part of deal activity, but pressure on the banking sector to shore up its balance sheets was evident; foreclosures climbed 13% in Q2.
A DEEPER DIVE: CLASS A OFFICE SPACE
According to JLL, office leasing demand took a positive turn this past quarter. Tenants are locking in Class A space at good rates now because the pipeline of new space is almost non-existent. Where the supply squeeze is intense, distressed Class A properties could command better rents or lower concessions, improving their valuations and chances for sale or refinancing.
The graph below shows the amount of Class A property on the watchlist, in special servicing or delinquent in relation to deliveries. The stingy amount of construction in the Mid-Atlantic region along with the significant availability of Class A space under duress makes it a region of particular interest. Washington D.C. and its Virginia suburbs may offer some opportunities.
The Midwest, especially Chicago, is in a similar situation. Only a moderate impact on market conditions is anticipated for the Southwest and Southeast regions. Denver and Atlanta offer the most supportive situation for Class A distress demand. In the Northeast and West, the wave of future fresh space dwarfs the amount of troubled square footage, and such properties may require steeper price discounts to attract investors. Significant construction activity in New York City and Los Angeles continues, despite a fair number of properties that have delinquent loans.
WHAT’S NEXT?
Stay tuned for next month’s Economic Update Q3 2024 to see how the quarter ends and what to watch for in the fourth quarter.
*Copyright© 2024 “July 2024 Commercial Real Estate Market Insights.” NATIONAL ASSOCIATION OF REALTORS®. All rights reserved. Reprinted with permission. September 2024, July 2024 Commercial Real Estate Market Insights (nar.realtor).