For the week of Sept. 23rd-27th, 2024
Last week, the commercial real estate (CRE) industry digested the impact of the 50 basis points cut in interest rates by the Fed, prompting the start of a new easing cycle. In other news, consumer confidence took a hit, office showed signs of stabilization, and the market closed in on the end of Q3 with early signs of strength in the appraisal market.
Here’s our latest top 5 list of the biggest weekly CRE news stories and why they matter.
- Rate cut signals the beginning of a new liquidity cycle.
While it has only been a week and a half since the Fed initiated the rate cut cycle, reactions from the market have been largely positive, as expected. In statements made at last week’s CREW Network convention in Vancouver, Kevin Thorpe, chief economist, and head of global research at Cushman and Wakefield, noted in his keynote that “With the first rate cut now in the rearview mirror, we are at the cusp of the next major growth cycle for commercial real estate.” A lender in the audience shared that she had 12 new deals land on her desk the day of the cut.
Head of Lender Strategy at LightBox, Candi Coleman, observed a less sanguine response from lenders in the latest CRE Weekly Digest podcast: “My sense in speaking with lenders, who tend to be a little less optimistic and more conservative, is that they didn’t necessarily expect an enormous response from the rate drop because by and large, it was already built into transactions. They have their eyes on the Fed funds rate over the long term with hopes of rates returning near 2% by 2026 because the spread on loans is still tight in this current environment.”
Why it matters: Cautious optimism appears to be the current sentiment across CRE although it is going to take time for the lending and investment sector to respond to the new rate cut environment. Despite concerns about distress and market uncertainty, the expectation is for better days ahead for occupancy, the re-engagement of CRE lenders, and a rebound in property transactions.
- Consumer confidence plunged in the biggest one-month drop since August 2021.
Recent data on a weaker jobs market resulted in consumer confidence falling in its biggest one month drop since August 2021. The Conference Board’s consumer confidence index slid to 98.7, down from 105.6 in August, as fears grew about a weakening jobs market and the high cost of living. The latest inflation data, based on the core Personal Consumption Expenditures, or PCE, index (excluding food and energy) rose 0.1% in August and increased 2.7% from a year ago while housing-related costs increased 0.5% in August, the largest move since January.
Why it matters: Over these next few weeks, updates on inflation and the labor market (i.e., job creation and unemployment) will be closely watched as indicators of the likely size of the next round of rate cuts. Analysts are already predicting how significant the rate cuts coming out of the Fed’s November and December meetings will be, and as they do, metrics on indicators like inflation, the job market, housing, and consumer confidence will take on even more significance. Any fault lines will be meaningful because the Fed will cut rates more aggressively if the economy appears to be slipping into a recession.
- Early signs of stabilization in the office sector.
Concerns about falling prices and rising vacancies have kept lenders skittish about the office sector. “If someone comes to a lender with a deal on an asset class that starts with an “O,” lenders don’t want to talk to them,” Coleman observed. “So, office certainly isn’t the darling that it once was in the investment world.” Yet the silver lining may be the increase in office leasing activity which could be an early indicator of a return to strength, particularly as large employers like Amazon require employees to return to the office. With each passing year, the work from home drag on square foot demand is fading. This year, there was a 3% reduction in office space demand versus a more significant 10% in 2021, signifying that companies have recalibrated their demand for space. Preliminary Q3 data from CBRE shows that San Francisco’s office market vacancy rate, for example, ticked up to a record 37% while the availability rate went unchanged. It is worth noting that OpenAI raised its commitment to San Francisco with news of leasing 350,000 square feet at the former Old Navy headquarters, a development coming on the heels of a 486,000 square-foot sublease of offices from Uber.
Why it matters: These could be early signs that the office sector is beginning to stabilize. Although lenders still view office as a high-risk asset class, the sector appears to be approaching an inflection point, and accelerated leasing activity may just turn things around in some markets.
- The LightBox Appraisal Index is positioned for Q3 growth.
Based on an analysis of combined July and August appraisal volume from lenders using the Collateral 360/RIMS platforms, the LightBox Appraisal Index came in at 72.1—a nearly 9-point increase over Q2’s reading of 63.3. This finding is a particularly promising early sign for Q3 given that July and August are traditionally a seasonally slow period of the year.
Why it matters: The Q3 results will be out this week so it will be interesting to see if the Index beats last year’s 57.9 Q3 number. While it is likely too early to show any impact from the first rate cut, the momentum of July and August are likely to continue into September.
- Home prices continue to rise as sales fall.
Home prices grew at the slowest pace in 8 months, according to the Case-Shiller Home Price Index, but are still inching up to new record highs. In the 20 biggest U.S. metro areas, average home prices set yet another record high in July, but the pace of price increases has decelerated significantly as prices and mortgage rates weigh on home buyers. In response, sales of newly built homes in the U.S. dipped 4.7% in August, as home buyers pulled back in the face of high interest rates and home prices.
Why it matters: Housing costs are top of mind for today’s consumer, particularly in light of the looming presidential election with both candidates offering different policies to address concerns. Rising home ownership costs in a still-high interest rate environment are putting pressure on both current and prospective homeowners. This has been a major factor driving interest in multifamily investment and development in recent years.
For commentary on these CRE developments and more, tune in to the LightBox CRE Weekly Digest podcast.
Did You Know of the Week
Did you know that lenders’ appraisal volume in Q2 grew 6.8 percent over the prior quarter and 4.9 percent year over year?
Subscribe To Insights
Be the first to get the latest news, updates and insights from LightBox.
