Research Brief

What the Past 5 Years Tell Us About the Future​

Range of Rare Headwinds of The Last 5-Years​

• A once in a century pandemic​
• 40+ Year High Inflation​
• A 500+ basis point interest rate surge ​

Despite Headwinds, CRE Performance Generally Sound ​

• Vacancy rates remain range-bound (except office) proximate to long-term averages​
• Positive sustained rent growth for most property types and most metros ​

CRE Investment Activity Poised to Accelerate ​

• Given CRE’s performance through some of the most severe headwinds on record, consider the potential going forward​
• Assuming a soft-landing, lower interest rates and a deep well of readily available capital, the CRE investment outlook positive​
• Consider the potential of CRE if the wind isn’t in the sector’s face…​

*Through August 22​
Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics, Federal Reserve​

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Is this a turning point for CRE markets?​

Capital Targeting CRE Investment Increasing​

• Pent-up dry powder being deployed into CRE assets ​
• Asset performance remains healthy, aside from some office segments ​

Yield Spread Widening Across CRE Sectors ​

• The average overall CRE cap rate rose 90 basis points since 2022, to 6.7% ​
• The gap between the 10-year treasury and CRE cap rates expanded to its widest level since 2022 ​

Cost of Debt Capital Coming Down ​

• The probability of a September rate cut by the Fed is a near certainty according to Wall Street ​
• Lenders are beginning to reduce their spreads over the basis as the risk of rate increases diminishes ​
• Share of lenders tightening their lending standards at lowest level since the second quarter of 2022​

*Through August 14​
Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics, Federal Reserve​

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Should CRE Investors Be Celebrating?

Unemployment Rises To 4.3% in July

• The BLS released data this month showing a 20-basis point rise in the unemployment rate to 4.3%
• As a result, media outlets and investors began discussing the potential for an upcoming recession

Precision Alters Crucial Recession Indicator

• The Sahm Indicator rose to recessionary levels on a rounded basis, sparking heightened uncertainty in the media
• However; on an unrounded basis the Sahm Indicator sits at 49, suggesting we are not entering a recession entering August

Why This Could Be A Turning Point For CRE Investors

• While cooling economic data is usually a bad sign for the economy, this time it could boost the outlook for investors
• CRE Investors have near record levels of capital waiting to enter the market, and deal flow is poised to rise quickly if the Federal Reserve responds to economic softening swiftly

*Through July
Sources: Marcus & Millichap Research Services, BLS

Discussion Video:

Distress In The Headlines… But What does the Data Say​

Wave Of Distressed Assets Hitting The Market Still Unlikely​

• Despite recent reporting, CMBS delinquency for most property types is well below levels that show widespread distress​
• Many of the assets in CredIQ’s tracker are well performing properties that will reach deals to extend loan terms​

Extend and Pretend Still Playing Out, But Shift Is Occurring​

• Many of the properties currently in negotiation are unlikely to reach market, lenders are shifting strategies​
• Some are using this period to clear off riskier loans, primarily on office assets, but also for low performing properties​

Delinquency Is Low As Rate Cuts in 2024 Seem Certain​

• While rising, overall delinquency rates for non-office properties are well below Financial Crisis or COVID-19 levels​
• As the Fed diminishing rates, lenders are expected to ease standard, further decreasing the likelihood of widespread distress emerging​

*Through June
Sources: Marcus & Millichap Research Services, CredIQ, Trepp​

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• How small increases in unemployment could hit a tipping point
• Has the Federal Reserve held rates too high for too long?
• The opportunities a weakening economy creates

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IS THE FED FINALLY WILLING TO CUT INTEREST RATES?​

Inflation Moving Towards 2% Target​

• New data last week shows CPI and Core CPI continued to trend lower (to 3.0% and 3.3% respectively)​
• Although these levels are still above the target, the Fed wants Core PCE at 2%, the trends remain very positive​

Economic Trends Suggest Pace Of Growth Is Flattening​

• Chairman Powell has noted the softening of the employment market, with the unemployment rate creeping higher​
• Loosening labor markets, flat inflation-adjusted retail sales, and other economic trends suggest economic growth is slowing​

Investor Perspective Beginning To Shift​

• Investor sentiment is beginning to rise as the likely of rate cuts this year increases​
• Elevated rates have created unique opportunities for investors stemming from conflicting economic expectations​
• The consensus forecast still calls for a Soft-Landing​

*Core CPI through June; Core PCE through May​
Sources: Marcus & Millichap Research Services, BLS, BEA​

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