CRE Sentiment on the Rise — Evening Brief – 09.30.24
While the commercial real estate market is still facing significant challenges, the outlook has improved, according to a new report from Deloitte. According to the team, over the next 12 to 18 months, CRE market leaders should be able to overcome the recent issues with clarity surrounding the strengthening of core capabilities and the fortification of balance sheets.
The improvement in sentiment for the rest of 2024 and 2025 was attributed in part to a less restrictive monetary policy stance. Experts cautioned, however, that a single rate cut is unlikely to immediately alleviate lingering concerns about refinancing risk for expiring loans, or to make money and debt for acquisitions suddenly cheaper or more accessible.
Deloitte economists predict the Federal Reserve to cut interest rates twice by the end of 2024, followed by four more cuts in 2025, with the federal funds rate settling at 4.5%, significantly above pre-pandemic levels of sub-1.0%. However, this would be far from record highs, more akin to conditions in the 1990s.
Deloitte polled 880 global CEOs and their direct reports from key real estate owner and investor organizations across 13 countries. The survey, 2025 commercial real estate outlook: Turning the Corner to Capitalize on a Generational Opportunity, reveals increased confidence, with about 90% of respondents expecting their company’s revenues to rise in the coming months.
In comparison, approximately 40% of respondents in the previous year’s survey anticipated a decrease in expenditure; however, this year, only 7% reported additional expense mitigation initiatives. A significant portion of that expenditure may be allocated to technology, as most respondents (81%) indicated that data and technology will be the primary focus of the upcoming year.
Calling a Low
If recent activity is any indication, the CRE market has hit bottom, according to Deloitte. Global property valuation declines continued through the second quarter of 2024, falling 6.3% year on year, however the rate of decline has slowed from 7.7% two quarters earlier.
Global property transaction activity is still subdued, down 31% year over year through June, though there is evidence that buyers and sellers are becoming more aligned on pricing estimates after two years of discontinuity, Deloitte said.
Lending Concerns
As real estate lending becomes an increasing area of interest among investors. CRE executives are concerned about the cost of capital. It is not the top issue, according to the study, but it is at the forefront as a wall of loan maturities approaches.
Deloitte stated that the anticipated maturities of commercial mortgages that were underwritten at lower interest rates will need to be refinanced. The loan maturity wall has been global in scope, with a cumulative value exceeding $1.7 trillion.
According to the accounting firm’s estimates for the first quarter, $600 billion in U.S. loans are expected to mature in 2024, with an additional $214 billion resulting from extensions that were originally scheduled to mature in 2023. In addition, in 2025, nearly $500 billion is expected to mature.
Deloitte advises owners and investors facing a near-term loan maturity to consider other capital sources, such as private lending, to cover the financing hole left by traditional lenders. The survey found that bank lending will likely remain more restrained than in the past as they manage their exposure to the sector in the face of regulatory scrutiny.