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Posted Nov 27, 2023

The state of CRE: A look back at Q3 2023

In their U.S. Real Estate Market Outlook Midyear Review, CBRE revised their 2023 forecasts with an extended timeline for a recovery pushing into 2024. With the recent release of their Q3 report, it would seem their revised forecast is right on track.

Here’s where the CRE industry finds itself as 2023 comes to an end.

Investment volumes are still trending down

While not every real estate sector has been affected the same, even the bright spots aren’t so bright. While multifamily saw the most Q3 investment volume at $29B, that is still a 62% YoY decline. Industrial and logistics were close behind at $20B in investment volume (down 44% YoY), and coming in third was retail with $15B (down 32% YoY). Perhaps unsurprisingly, office saw the most significant decrease in investment volume at 67% YoY, down to $10B. CBRE attributed the continuing fall in investment volume to high-interest rates, tight credit conditions, and economic uncertainty.

However, with the Consumer Price Index (CPI) being relatively flat in October, CBRE does not expect the Federal Reserve to raise interest rates again this year. As inflation continues to cool, they predict that the Fed could begin cutting rates as early as March 2024, which could drive investment activity recovery by mid-2024.

The U.S. CRE market still has a good reputation with international investors

While the U.S. saw a decrease in inbound cross-border investment of 55% YoY in Q3 to $3.4B—hotel was the only sector to see an uptick in investment activity YoY—the U.S. market still strongly appeals to international investors.

On a recent episode of The Distribution with Juniper Square, CBRE Investment Management Chief Economist and Head of Insights and Intelligence Sabina Reeves said, “The beauty of the U.S. market, from a global perspective, is that you have portfolios you don't have in Europe. You can execute the strategy you like, which isn't always possible everywhere else.” She specifically called out opportunities in student housing and single-family rentals. This sentiment was echoed by Bert van den Hoek of Bouwinvest International, who told Juniper Square’s Brandon Sedloff that he opened the firm’s New York office in 2020 “In order to be closer to the market, forge closer relationships and be more closely knit into the overall U.S. network.”

The rise of private credit

According to a recent report from the Federal Reserve’s Board of Governors, while the “banking sector remains sound overall…delinquencies for CRE and some consumer sectors have increased from their low levels, and banks have increased credit loss provisions. Liquidity and interest rate risks also remain elevated for some banks, partially attributed to the increased funding costs and significant fair value losses on investment securities.”

Delinquency rates for non-agency CMBS loans rose to 4.40% in Q3, up 30 basis points (bps) quarter-over-quarter and 163 bps year-over-year. In October alone, office delinquencies rose another 51 basis points.

The flip side of this coin is that private credit is booming—Morgan Stanley predicted it could become a $2.3 trillion market by 2027—and private lenders are in high demand for groups that need capital. Ted Martell at Maverick Real Estate told Juniper Square that there is an opportunity within the private lender space to provide rescue capital to property owners. “Another place we've seen opportunity is when we have banks who want to sell loans, asking us what we think it might be worth.”

The market remains frozen

The general consensus remains that we’ve seen this situation before, and things will get better. The big question is: when will the turnaround come?

As Reeves shared, everyone seems to be waiting “for price discovery and appraisals to move to get some liquidity back into the market.” The Fed lowering interest rates could also begin to unlock markets and lower the cost of capital. The turnaround also depends on lenders and owners avoiding massive write-downs–especially for regional banks, some of the biggest CRE lenders–to avoid regional banks collapsing.

With only a few weeks left in 2023, only time will tell how soon any of this becomes a reality.