The outlook among commercial real estate industry players remains mixed as 2024 officially hits its midway point.

A second-quarter survey of industry representatives by Altus Group found slightly more respondents were concerned about the possibility of a recession compared to the prior quarter, but a greater share felt better about debt capital availability.

While about half of the respondents said they didn’t anticipate a recession in the near term, the number of individuals who said they did expect a recession soon increased by seven percentage points compared to Altus’ first-quarter survey. Additionally, many respondents believe the U.S. capital environment will remain a challenge, with 49% saying they expect interest rates will remain stable in the next year, but 40% of respondents saying they felt the cost of capital will increase in the next year.

Cole Perry, senior market analyst at Altus, said past surveys done by the firm, especially at the end of 2023, indicated optimism about several possible interest-rate cuts in 2024. That outlook has since dimmed, with the Federal Reserve deciding to hold off on cutting rates until inflation moves closer to the agency’s 2% target.

Fewer and later rate cuts have made the industry somewhat more pessimistic about dealmaking, according to the survey, but it’s possible more people will start to move forward on transactions despite the higher-for-longer rate environment.

“The optimism is still there, but I think folks are just really starting to accept the cost of capital as it is right now,” Perry said. “I think the thing that’s most interesting is, even if they expect cost of capital to remain high, and one or two rate cuts isn’t going to do the trick to get the wheels turning, they had a lot less concern about capital availability.”

According to the survey, expectations for debt capital availability among U.S. respondents improved by 20 percentage points for mortgage REITs, 22 percentage points for insurers and 36 percentage points for securitizations compared to the previous quarter’s survey. Meanwhile, expectations for bank lenders declined by 33 percentage points in that same time period.

Perry said it’s likely many in commercial real estate don’t expect bank lending to come back anytime soon, but groups are finding opportunities among alternative lenders, such as life-insurance companies and debt funds.

“There’s a lot of hope that alternative debt sources will be somewhat available for the rest of the year and going into 2025,” he said.

Pricing still a challenge for CRE deals

One key aspect to dealmaking apparently remains stalled: the bid-ask spread between buyers and sellers. That gap is likely preventing many deals from crossing the finish line.

Among the four main property types (office, industrial, multifamily and retail), more than half of respondents in the Altus Q2 survey said they felt multifamily and office assets were overpriced, at 61% and 56%, respectively. Among all property types, 72% of respondents said they felt land/development sites were overpriced, and 67% said the same about life sciences properties.

Retail was seen as the most fairly priced among the categories in the survey, with 83% of respondents saying so.

The survey results suggest there’s still a ways to go for buyers and sellers to meet on pricing, Perry said.

“I think what you’ll see is deals possibly pick up in some non-traditional sectors before they pick up in office or industrial or some of the main property types,” he said.

The office segment remains the biggest, and most daunting, question mark among commercial real estate property types. Although some office towers have sold this year — albeit in some instances at significantly lower values than they last traded — there remains a significant swath of buildings sitting mostly vacant and without a clear future.

Perry said the bifurcation in the office market means that trophy central business district properties, as well as well-located buildings in the suburbs and just outside a city’s urban core, will continue to do well. It’s Class B and C buildings in less-prime locations that will continue to have a murky future.

“Eventually, buyers and sellers will have to meet on that pricing, but I would expect a lot of distress in that middle space,” Perry said. “I think buyers and sellers still have not met on where that stuff is actually priced. You get a lot of folks talking about waiting for distressed sales. I think we’re still waiting on those.”

Home Prices Are Expected To Climb Moderately

Home prices are forecasted to rise at a more normal pace. The graph below shows the latest forecasts from seven of the most trusted sources in the industry:

The reason for continued appreciation? The supply of homes for sale. Jessica Lautz, Deputy Chief Economist at the National Association of Realtors (NAR), explains:

“One thing that seems to be pretty solid is that home prices are going to continue to go up, and the reason is that we don’t have housing inventory.”

 

While inventory is up compared to the last couple of years, it’s still low overall. And because there still aren’t enough homes to go around, that’ll keep upward pressure on prices.

If you’re thinking of buying, the good news is you won’t have to deal with prices skyrocketing like they did during the pandemic. Just remember, prices aren’t expected to drop. They’ll continue climbing, just at a slower pace.

So, getting into the market sooner rather than later could still save you money in the long run. Plus, you can feel confident experts say your home will grow in value after you buy it.

Mortgage Rates Are Forecast To Come Down Slightly

One of the best pieces of news for both buyers and sellers is that mortgage rates are expected to come down a bit, according to Fannie Mae, the Mortgage Bankers Association (MBA), and NAR (see chart below):

When you buy, even a small drop in mortgage rates can make a big difference in your monthly payments. For sellers, lower rates will bring more buyers back into the market, which can help you sell faster and potentially at a higher price. Plus, it may help you get off the fence, if you’ve been hesitant to sell due to today’s rates.

Home Sales Are Projected To Hold Steady

For 2024, the number of home sales will be about the same as last year and may even rise slightly. The graph below compares the 2024 home sales forecasts from Fannie Mae, MBA, and NAR to the 4.8 million homes that sold last year:

The average of the three forecasts is about 5 million sales in 2024 – a small increase from 2023. Lawrence Yun, Chief Economist at NAR, explains why:

“Job gains, steady mortgage rates and the release of inventory from pent-up home sellers will lead to more sales.”

 

With more inventory available and mortgage rates expected to go down, a few more homes are expected to be sold this year compared to last year. This means more people will be able to move. Let’s work together to make sure you’re one of them.

Commercial real estate loan delinquencies are still rising but at a slower pace than they have been since the post-pandemic disruption in the industry.

Overdue commercial real estate loans tied to U.S. banks increased to 1.25% in the first quarter — a new cycle high, according to a recent analysis by S&P Global Market Intelligence. Even so, the quarter’s 10 basis-point increase from the prior quarter was slightly less than the 11 basis-point increase for the fourth quarter of 2023 and a 21 basis-point jump in the third quarter of last year.

Commercial real estate loan delinquencies are being closely monitored as the office market in particular is seeing drops in occupancy and value amid a higher interest-rate environment that looks likely to persist for longer than expected.

Many lenders have reworked terms with borrowers, including on troubled loans, or have extended the maturity date. Despite that, there’s palpable concern about what happens to the $929 billion in outstanding commercial mortgages across all CRE lender types the Mortgage Bankers Association estimates will mature this year.

“Although higher interest rates continue to challenge commercial real estate, there are plenty of reasons for cautious optimism that a turnaround is on the horizon,” Wells Fargo & Co. economists wrote in a May 28 note. “What’s more, the slower pace of price declines is a sign that the air of pessimism surrounding the asset class is beginning to dissipate as less restrictive monetary policy comes closer in view.”

But lenders remain cautious about their exposure to commercial real estate, prompting slower lending activity overall in the sector.

Year-over-year commercial real estate loan growth was 3% in the first quarter of the year. That’s a slight uptick from the 2.9% growth in the fourth quarter of last year but well below the 12.1% peak in the third and fourth quarters of 2022, according to S&P Global.

Brent Maier, real estate advisory leader at Baker Tilly, told The Business Journals in an interview last month traditional, regulated lenders are having to set aside or increase their reserves for potential write-offs or loan workouts.

“That effectively takes capital off the table to deploy into these real estate loans,” Maier said. “The second thing, too, is the appetite to deploy capital into real estate loans has decreased,” but, he added, there is capital available for creative financing, depending on a borrower’s relationships and appetite for cost.

Some banks have opted to sell their commercial real estate loan portfolios in an effort to reduce their exposure to the sector. Those deals may have contributed to the number of banks exceeding regulatory guidance for commercial real estate concentration reaching its lowest mark in the first three months of this year since the third quarter of 2021.

Among the 20 banks with the largest commercial real estate loan portfolios, CRE loans increased by a median 1.2% compared to the same quarter in 2023, according to S&P Global. JPMorgan Chase & Co. saw its commercial real estate loan portfolio grow 29.3% in the past year, thanks largely to its acquisition of First Republic Bank in May 2023.

Denver’s job market has gained momentum this year after a hiring pullback through most of 2023.

The market’s unemployment rate fell to 3.5% in April, according to the latest jobs report from the Bureau of Labor Statistics, down from the recent peak of 4.2% in February.

The region added 18,300 jobs in the first four months of 2024, driven by a few key sectors.

Notably, employment in higher-paying jobs, which can have a multiplier effect in further job creation, is picking up. The office-using professional and business services sector leads in job gains year to date, adding 7,000 positions. Jobs in this sector pay an average of about 20% above the Denver metropolitan annual mean wage, according to BLS data.

The government sector continues to outperform and is now above pre-pandemic staffing levels. Overall, about 6,600 jobs were added since the start of the year.

Only two sectors shed jobs during the first four months of the year. This includes the information sector, which contracted by 1,000 jobs due to persistent weakness in the technology industry.

Additionally, payrolls in the industrial-using trade, transportation and utilities sector fell by 4,600 jobs this year. Denver’s population growth slowed in recent years, which has had a delayed negative impact on local industrial demand.

Denver is geographically isolated, and distributors need to have a local presence to reach the Front Range consumer base and satisfy fast delivery expectations. This generated outsize industrial demand when population growth was strong, but it is not the tailwind that it once was, and logistics firms have trimmed headcounts to right size operations.

Conversely, the manufacturing sector continues to grow, adding 1,100 jobs year to date. Momentum in this sector could continue through the next year. PepsiCo’s new manufacturing facility, which will be its largest plant in North America, is expected to open near Denver International Airport in 2025. The company plans to hire an additional 250 workers at the location.

While hiring has picked up, the recent gains were not enough to make up for job losses in 2023. Annually, the Denver metropolitan area has lost roughly 9,900 jobs. While the unemployment rate fell in recent months, it is still up 80 basis points from a year ago.

Even though a record burst of new apartment developments has heightened competition among landlords in the Denver area, multifamily giant Embrey Partners isn’t backing down as it pieces together plans for its next project.

The San Antonio firm, which has six other developments underway across the Centennial State, acquired a trio of sites it plans to stitch together for a future 395-unit project in Englewood, Colorado, Embrey confirmed. The purchase comes as many property managers and owners scramble to compete for tenants in a market that, for the past several years, has faced one of the strongest construction pipelines in the country.

The nearly $20 million deal for the properties at 1314 W. Oxford Ave., 1315 W. Quincy Ave. and 1325 W. Quincy Ave. totals about 9 acres, according to CoStar data, and will eventually mark the developer’s 17th Colorado project.

The initial phase of units, as well as the complex’s clubhouse, are expected to finish construction sometime in the second half of 2026, the developer said. The rest of the project will likely be completed the following year.

Cresset Partners, a private investment firm, is helping to finance the project. The financial details of the agreement were not disclosed.

While tenant demand has returned after a brief dip last year, the influx of multifamily developments in and around Denver has pushed the region’s vacancy rate from about 5.5% in mid-2021 up to about 9%, according to CoStar data. That could jump even higher with the more than 23,000 units moving through the construction pipeline, adding to the more than 14,000 units completed over the past year.

Embrey has long been an active player in the Denver development scene, adding to its portfolio projects such as the Encore at Boulevard One; the Luxe at Mile High; the Hensley at the District in Centennial, Colorado; and the Belaire in Lakewood, Colorado.