By: Head of Data Strategy at LightBox, Manus Clancy
The big headline in September was the 50-basis point Fed rate cut. The hot take for the bond markets was an immediate dip in long-dated Treasury yields. The dip—which turned out to be the culmination of a four month decline for Treasury yields—gave a big psychological lift to the commercial real estate (CRE) market.
Fast forward 45 days, investors learned the hard way that a lower Fed Funds rate does not necessarily equate to lower yields at the long end of the Treasury curve. Since bottoming at about 3.62% in mid-September, the yield on the 10-year Treasury has been steadily climbing. The yield on that bond ended September at 3.81%, but by the time parents were taking their kids out trick-or-treating on Halloween, that yield was up to 4.28%.
The CRE market is well aware of what higher long-term rates means— after having endured them for the last 30 months: upward pressure on cap rates, downward pressure on values, more challenges refinancing maturity debt, and a dampening of “animal spirits.”
The bottom line is that a CRE recovery is coming— but no one should expect it to come in a straight line.
Fed’s Data Dependency Cuts Both Ways
The Fed has often claimed that it is “data dependent” meaning that the data will dictate how many and how soon future Fed rate cuts will come. When CPI (consumer price index) and PPI (producer price index) were marching lower from the summer of 2023 to the summer of 2024, that “data dependency” was a tailwind for the CRE market. Benign readings would increase hopes that Fed rate cuts were coming.
However, over the last 30 days, several better, or hotter than expected, data prints show the data weathervane can change direction.
A much better than expected September jobs number along with modestly disappointing CPI and PPI numbers last month quickly brought into question just how dovish the Fed might be with interest rate policy in the coming months. That had a lot to do with the changing direction of bond yields last month.
(As a footnote, we are writing this piece on November 1st— with the October jobs number having been printed less than two hours ago. The reaction is a worrisome indicator that yields may not reverse course anytime soon. The October jobs number came in well below estimates. Normally such a weak number (12,000 jobs and a negative number for the private sector) would push bond yields lower. However, after two hours of trading, the yield on the 10-year was actually up five bps. Not a great start for November.)
Some Bright Spots
There’s an expression in sports that you are never as bad as you look when you are losing and you’re never as good as you look when you’re winning.
So, while our comments thus far have been downbeat, there were plenty of bright spots for the CRE markets last month. Here goes.
Office (Yes Office!)
Clearly, we are grading on a curve here, but even in the beleaguered office market, there are some signs of life.
The Real Deal noted recently that there were 54 office sales in the San Francisco market for the first nine months of the year. That was up from just 30 in 2023.
As we noted, we are grading on a (sharp) curve. The average price per square foot was only $282 per square foot—down from $322 in 2023. The 2024 prices often represented 60% or higher discounts to comparable sales just five or 10 years ago.
So why is this a bright spot? Simply because there is something worse than deeply discounted sales. That is, no sales at all. The fact that sales activity in the office space allows for more price discovery to take place and for that market to start forming a bottom. (Let’s hope).
Multifamily
The multifamily market continued to lead the way in terms of big sales tickets.
Among the highlights…
An investor group that included former boxing champ Floyd Mayweather announced it would be acquiring a portfolio of 60 buildings with 1,000 NYC units for $402 million.
Ethos Real Estate paid more than $250 million for a 697-unit apartment complex in San Mateo, CA. The community is set to undergo renovations transforming it into affordable housing, marking one of California’s largest conversions from market-rate to affordable units.
MF Capital paid more than $150 million for a five-property, nearly 1,500-unit portfolio in Louisville, KY. The sale represents the largest multifamily transaction in Kentucky thus far in 2024.
Hospitality
In South Florida, the Reuben Brothers spent $425 million to acquire the W South Beach hotel, making it the biggest hospitality transaction in the region so far this year.
Industrial
There were several nine-figure industrial sales including portfolios in MN, AZ, and NJ.
The Last Word
The significant rise in Treasury yields in October has left us modestly more conservative in our optimism for the CRE market than we were a month ago.
We were never believers that a near-term, 2021-like CRE recovery was coming in 2025. But we did believe that the falling rate, price discovery, and buyers with lots of dry powder would allow Q4 to surprise to the upside.
We stand by that sentiment with the caveat that a Q4 upside surprise might be more subdued than we might’ve predicted in September.
Stay tuned.
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