The commercial real estate market in 2024 continues to be a dynamic and evolving sector, shaped by a range of factors including economic trends, fed policy changes, demographic shifts and regulatory changes. If you’ve been keeping an eye on the commercial real estate market and wondering if now’s the time to make a move, this blog is for you. Market conditions might appear uncertain, yet there are still ample opportunities for those who know where to find them. In this short blog, we’ll share the current trends we are seeing and share our insights on what the future may hold, aiming to equip you with the knowledge you need to invest with confidence.

 

State of the Market

As of May 2024, the commercial real estate market has remained relatively unchanged since the end of 2023. This is somewhat encouraging, indicating that the downward trend observed from mid-2022 through the end of 2023 might be leveling off. The period of uncertainty that dominated 2022 and 2023 seems to be giving way to more certainty in terms of the path of interest rates in 2024, which in itself brings more stability to the industry. The Fed Fund Rate has held steady at 5.5% since July, and recent Federal Reserve announcements suggest we may or may not have the anticipated reductions this year since the economic data that the Federal reserve monitors has not provided the confidence that inflation is yet under control. The two to three cuts that the market was anticipating in Summer and Fall may now be further delayed.

What this means for CRE is that we are still in a frozen market with very minimal deal activity. Though brokers have a large BOV pipeline, the ratio of what is getting listed is quite low as the marketplace still has a large bid-ask gap between buyers and sellers. Asset prices are still down by 20-30% or more, depending on the asset class, though the decline this quarter is less severe than in previous ones. That said, we are seeing cap rates widen on the older vintage Class C assets a lot more than the Class A/B+ assets. Deals for newer, well-priced properties are attracting significant interest, evidenced by 30+ offers and 50+ tours, highlighting the imbalance between the limited supply and the high demand for those Assets. Conversely, older Class C properties, especially those priced over $20 million and not yielding near a 7% cap rate, are experiencing reduced liquidity.

There are several floating rate loans that originated in 2021 that will be maturing this year and this will force owners to sell if they are unable to sell or refinance. The general consensus is that deal flow should increase in the second half of the year, but we believe it may be less than initial estimates especially as we see the interest rate cuts get further delayed. It is important to be actively engaged with the broker community and keep your pulse on the market.

 

Our View

As a company, we’ve actively underwritten 86 deals and submitted offers on 7 of them in Q1 of 2024. Our thesis at the end of 2023 was that the next 12-18 months may be the optimal time to purchase assets at a significant discount. We do believe in this thesis still, but the window could be smaller than we expected given the huge amount of capital on the sidelines as prospective buyers seek to take advantage of these discounts. That said, with interest rates elevated it is much harder for deals to pencil to historical return expectations and many buyers are on the sidelines, unable to make sense of these short-term challenges. The sponsors and investors that stand to benefit will be the ones that can see well into the horizon, past the short-term challenges, and have the conviction that long-term multifamily fundamentals remain strong. We are in the latter camp and are actively looking to capitalize.

 

Conclusion

In conclusion, as we move forward in 2024, being patient and having a longer-term view is going to be critical for long-term investing success. The market is shifting but still holds opportunities. The year ahead will still consist of challenging times, but by staying agile, adaptable, and informed you will be able to navigate it successfully.