Some Optimistic Capital Market Predictions for 2024

Article originally posted on Globe St. on December 15, 2023

It was a year ago that many in the industry were predicting improved conditions in 2023, with price discovery, more transactions, and all-around better markets. The optimism didn’t last long, with continued interest rake hikes, bank failures, skittish lending, plunging transaction counts, and falling valuations.

A projection of better times in 2024 seems like courting eventual disappointment. However, conditions are far different. Inflation continues to come down, largely due to supply chain improvements since the global pandemic disruption. The Federal Reserve’s latest meeting resulted in holding rates steady and projecting three reductions in 2024. A recession is less likely than it had been. All this could take pressure off refinancing and CRE in general.

Which is why CBRE’s projection that capital market activity is expected to stabilize comes across as optimistic, if with caveats.

“We expect that commercial real estate investment activity will begin to pick up in the second half of 2024, although an uncertain macro environment and elevated interest rates will continue to weigh on investor and lender sentiment,” they wrote. “We also expect losses in the banking sector due to decreases in real estate values. Even though charge-offs will be spread out over the course of the next several years, some banks will fail and their appetite to lend to commercial real estate will remain muted throughout 2024.”

In other words, expect the need for significant recuperation. Office properties will remain hard-pressed to receive financing, “particularly for non-Class A assets.” There will be select financing available in multifamily, industrial, and grocery-anchored retail, “but asset quality and existing relationships with borrowers will be key considerations for lenders.”

If CBRE is right, there is plenty of capital for dealing. The company estimated something north of $250 billion in dry powder sitting on the sidelines at the end of 2023. But with caution comes patience. They only suggested that “some of this capital” will get deployed through 2024. Perhaps investors are waiting to see exactly what happens and, maybe, the degree to which distressed opportunities might come into play. Whatever the case, they’re expecting a 5% year-over-year drop in transactions, which is far better than the 45% drop in 2023.

Perhaps one of conditions delaying entry of more capital is the unstable state of cap rates for most property types. CBRE says wait until the second half of the year for them to steady. “Cap rates, excluding those for office assets, increased by roughly 150 basis points (bps) between early 2022 and late 2023 depending on market and asset type,” they said. “Office cap rates rose by at least 200 bps. This implies a 20% decline in values for most property types. We think cap rates will expand by another 25 to 50 bps in 2024, with a corresponding 5% to 15% decrease in values.”