History has shown that when real estate prices decline—due to rising capital costs, falling net operating income, or both—owners strive to hold onto their assets until market conditions improve and prices rebound. Historically, this market recalibration has averaged around 24 months during past economic downturns.
We began to see a steady decline in pricing from March 2022, coinciding with the U.S. Federal Open Market Committee’s series of rate hikes. Now, twenty months later, with interest rates appearing to stabilize, investors might regain the confidence to set pricing and cautiously re-enter the CRE sales market.
Against this backdrop, here are five critical topics that captured the attention of CRE professionals in 2023 and are likely to remain pivotal in 2024. While the current cycle’s distress is predominantly seen in office assets, these dynamics are relevant across all CRE asset classes:
1. Extend and Pretend’ Strategies: As market conditions evolve, lenders and borrowers are extending terms on maturing loans, providing borrowers more time to refinance and avoid foreclosure, while lenders circumvent the need to manage devalued assets.
2. Banking System Resilience: Despite numerous warnings in 2023, systemic bank failures did not materialize. Experts predict that distressed CRE assets will trickle into the market over the next 24 to 36 months, preventing a sudden, overwhelming impact on the banking system.
3. Proactive Property Transfers: Many office building owners have opted for deed-in-lieu-of-foreclosure arrangements. Preparing detailed property transfer plans can help borrowers retain management fees and mitigate reputational damage.
4. Evolution of Niche Real Estate: With office buildings losing their status as dependable investments, there’s increasing pressure on niche CRE alternatives to stabilize portfolios. Investors are now seeking new property types to redefine core assets.
5. Fundamentals Driving Returns: In the absence of cap rate compression, traditional management and client service are key. Prioritizing tenant satisfaction is crucial for top-tier buildings, especially given the scarcity of ESG-compliant properties in the U.S., which are highly sought after by international investors.
As we navigate these trends, staying informed and adaptable will be essential for success in the evolving CRE landscape.