For the week of Nov. 11th-15th
After a day of giving veterans much-deserved attention, last week brought the latest Labor Department inflation report of consumer prices edging up in October and a spike in the 10-year Treasury, MBA data on the third quarter’s uptick in commercial real estate (CRE) lending, and a boost for office leasing from the technology sector. Retail investors are betting big on consumer spending with a number of large deals making headlines, and environmental consulting leaders on the LightBox Market Advisory Council shared a look at where the market is seeing strong demand for due diligence at this early stage of recovery.
Here’s our latest top 5 list of the biggest weekly CRE news stories and why they matter.
- CPI Edged Up Slightly in October, 10-Year Treasury Yield Jumps
In the Labor Department’s latest inflation report, the consumer price index increased 0.2% in October, taking the 12-month inflation rate up to 2.6%. Core prices, which exclude food and energy items to more accurately reflect inflation’s underlying trend, were up a more significant 3.3%. Both numbers were in line with expectations, and traders responded by upping their bets that the Fed would cut rates by another quarter point at the December meeting rather than holding firm. The October uptick came after the CPI recorded the slowest rate of growth in 3.5 years in the previous month, evidence of the uneven pace of progress toward the Fed’s 2% target rate. By week’s end, the 10-year Treasury yield hovered near a four-month high after Fed Chairman Powell’s comments in Dallas that “the economy is not sending any signals that we need to be in a hurry to lower rates” given the strong U.S. economic growth and the drop in weekly jobless claims.
Why It Matters: Before the inflation report, futures markets had been pointing to a 60% chance the Fed would cut rates at its meeting next month, but after the report, that rose to around 80%. Speculation about what President-elect Trump’s transition could mean for the path of interest rates continues, but the latest news suggests that Trump and Powell could be aligned on a policy of modest rate cuts at least over the near-term.
- CRE Lending Surged 44% in the Third Quarter
After a slow first half, CRE borrowing and lending activity showed promising momentum in the third quarter of 2024, according to the Mortgage Bankers Association (MBA). Based on the MBA’s Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations, commercial and multifamily mortgage originations rose a dramatic 59% compared to the same period in 2023 and 44% quarter over quarter. Jamie Woodwell, MBA’s head of CRE research, said that a drop in the yield on the 10-year Treasury bond, which fell from an average of 4.31% in June to 3.72% in September, played a significant role in the increased activity. “Long-term rates have increased more recently, which could slow the momentum [when Q4 data comes out],” he said. Compared to Q2 2024, loans from depositories surged 86%, while GSE loans increased by 55%, life insurance company loans rose by 40%, investor-driven lenders by 21%, and CMBS by 12%.
Why It Matters: The MBA is forecasting 23% growth in commercial and multifamily lending for calendar year 2024 so this latest Q3 surge gets annual volume closer to that projection. The MBA is forecasting another 25% increase next year as market adjusts to lower rates and banks re-engage, in addition to the growing urgency of dealing with the wall of loan maturities.
- Market Advisory Council Points to Stronger Demand for Environmental Due Diligence
Based on the latest round of input from the LightBox Environmental Due Diligence Market Advisory Council, industry leaders are seeing pockets of early signs of stronger growth in demand for Phase I environmental site assessments (ESA). With many large lending institutions curbing originations out of concerns about elevated CRE risk concentrations, smaller lenders and well-capitalized buyers are picking up the slack. As the bid-ask gap that challenged dealmaking begins to narrow, Council members are seeing new property investment from clients who were previously on the sidelines. Several Council members also observed a dramatic increase in Q3 work from lenders and developers compared to previous quarters as they capitalize on new opportunities driven by new financing options or improved market conditions. Another strong area of growth in the past quarter was environmental due diligence to support M&A activity, which is up year over year as companies reposition for near-term growth opportunities.
Why It Matters: Given that environmental due diligence is conducted prior to CRE transactions, demand for Phase I ESAs is a strong early indicator of increasing velocity. Council members report from the front lines that clients who had been sitting back earlier this year are starting to increase activity now that interest rates are finally starting to come down. Consultants expect to see stronger transaction and lending activity ahead as the widespread transfer of CRE assets and property redevelopment gets underway along with an increase in refinancing as loan maturities come to the surface.
- Strong Growth in AI Offers Office Sector Relief as Leases Expire
In Manhattan alone, nearly 55 million square feet of office leases are expiring over the next 36 months, presenting significant challenges for property owners. As leases expire in major central business districts across the U.S., the pain will be felt unevenly as some leases renew and others don’t as companies opt to reduce or “right size” their office footprints. One segment that seems poised to provide some relief to the downward trend in office space demand is technology companies whose leasing of office space jumped in the third quarter to its highest level in nearly three years, according to a new report by CBRE.
Why It Matters: The impact of hybrid work in the post-COVID world puts downward pressure on demand for office space, but the rapid growth in artificial intelligence and hiring by tech companies is countering that trend as new AI firms like OpenAI and expansion by leaders like Alphabet’s Google and Microsoft sign leases for new space in San Francisco, New York City, Seattle, and Boston.
- Strong Retail Sales Data as Investors Bet Big on Retail’s Prospects
The latest news from the Commerce Department that retail sales gained 0.4% in October from September was better than economists’ forecasts of a 0.3% increase. This, along with the latest decline in weekly jobless claims, offered another encouraging sign of a strong economy. Officials also revised their figures for September sales growth sharply upward to 0.8%, from an initial estimate of 0.4% growth. This news came on the heels of Blackstone, a global investment giant with $336.1 billion in real estate assets, acquiring Retail Opportunity Investment Corp. in an all-cash $4 billion deal.
Why It Matters: In recent years, the retail real estate sector has faced challenges amid forecasts that the rise of e-commerce would replace brick and mortar storefronts. Instead, store vacancies are at record lows amid a resurgence in demand for physical retail space, particularly for major grocery chains and discount retailers. The Blackstone acquisition of a REIT that owns strip malls across the U.S. is the latest sign of large institutional investors betting big on high-quality retail real estate.
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 91% of LightBox’s CRE Market Advisory Council expect to see higher property transaction volume in Q4 than in Q3, with none expecting a decrease?
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