By: Head of Data Strategy at LightBox, Manus Clancy
Welcome to the annual LightBox “Successes, Setbacks, and Surprises”—a comprehensive look back at the Commercial Real Estate (CRE) market in 2024. From standout successes and unexpected setbacks to market-moving surprises, we reflect on the hits, misses, and key trends that defined the year.
Turning the Page on 2023
When the Times Square New Year’s Eve ball dropped to end 2023, the CRE market was at a crossroads. The 18 months leading up to December 2023 had been particularly painful for CRE professionals. The result of inflation topping 9% and the Fed reacting by pushing short-term rates up five percentage points doused what had been a red-hot CRE market. Lending dried up; borrowing costs surged; property values sank; and distressed asset rates climbed.
At the end of 2023, there were reasons for both optimism and pessimism.
For the “glass half empty” type, Q4 2023 represented a nadir. Even by 2023’s anemic standards overall, the fourth quarter stood out for its dearth of property sales and low loan origination volume. In addition, there was the “survive to 25” sentiment, underscoring that most CRE pros were expecting 2024 to be another disappointing year.
Yet there were reasons for optimism. The yield on the 10-year Treasury had moved from just over 5% in October 2023 to under 3.80% in December 2023, giving rise to hope that CRE might turn the corner before 2025. Then there were some who believed that 2024 would bring as many as six Fed rate cuts, starting as early as March or April.
Alas, the optimists would be disappointed. The Fed would not cut interest rates until September 2024; the yield on the 10-year would test 5% once again over the months following the first cut; and CRE activity would inch up rather than roar back.
With that as our background, we offer up the Successes, Setbacks, and Surprises of 2024.
Successes
Even though 2024’s CRE recovery was modest and uneven, there were some segments that stood out last year.
Lending: Throughout 2023, financing was challenging. Those with maturing debt found the cost of funding expensive and the pool of originators smaller than in past years. The failure of Silicon Valley Bank in the spring of 2023 and the ensuing threat of deposit runs at other banks, made banks cautious for the remainer of 2023. In addition, the prohibitively high cost of floating rate debt closed the spigot of private equity/ CRE collateralized loan obligation (CLO) lending after a very active 2021 and 2022.
Particularly tricky in 2023 was obtaining construction financing or avoiding the dreaded “cash in refinancing” as borrowers found themselves having to replace 3% loans with new, 6% or 7% debt.
Fortunately, the lending shackles fell off as 2024 progressed. Banks began to lend as the memory of Silicon Valley Bank faded and the CMBS market saw impressive volume as that financing vehicle provided much needed liquidity. Even offices and shopping malls—only the best ones, to be sure—were able to tap the capital markets.
Borrowers also benefitted from compressing risk premiums. The combination of falling Treasury yields and tighter lending spreads made borrowing less punitive in 2024. While the lending recovery started slowly, momentum picked up significantly by the end of the year. The Mortgage Bankers Association (MBA) reported that commercial and multifamily mortgage loan originations were up by only 3% year over year in the second quarter. However, by the end of the third quarter, lending volumes were up 59% year over year and 44% higher than Q2 in anticipation of lower interest rates and refinancing activity.
The CMBS Market: As noted, the CMBS market provided a safety valve for borrowers during a period when other lenders were cautious. In the past, the CMBS market had largely been a “ten-year market.” That meant, the majority of loans were 10 years in length with prepayment restrictions in place for nearly the entirety of the loan term.
With interest rates and spreads high in 2023, borrowers had no appetite to be locked into high-cost debt for a decade. The CMBS industry reacted by creating a five-year product which allowed borrowers to avoid locking into punitive loan rates for 10 years. The innovation helped the CMBS market provide important liquidity in 2024.
Intrepid Risk Takers: It may take a while for this segment to be declared an unmitigated success, but there was no doubt that buyers with strong constitutions were able to pay for assets at deep discounts. On the office front, intrepid buyers were able to acquire properties at discounts of 70% or more to where those properties were valued 10 years ago.
For fixed income investors, 2024 provided nice entry points as high interest rates and risk-rewarding spreads early in the year were a pleasant alternative to the anemic returns of 2020 to 2022.
Adaptive Reuse: As the CRE market adapts to changing preferences, opportunities for adaptive reuse developments gained traction, and cities rolled out subsidies, tax breaks and other incentives to attract development. As office vacancy rates rose and property values fell for some older office buildings, developers moved in to fund new multifamily or affordable housing projects. Developers are converting old malls or shopping centers into mixed use or live-work-play communities to meet the demand of today’s consumers and tenants.
Borrowers and Property Owners: 2024 saw a modest but steady increase in CRE activity throughout the year as reflected by the LightBox CRE Activity Index, an aggregate measure of property listings, commercial appraisals, and environmental due diligence. Improving liquidity and falling rates help property values firm up in late 2024. To be sure, this was no U-shaped or V-shaped recovery: property values remain well below their early 2022 peaks. But there was some progress in the second half of 2024 in most asset classes, and in the beleaguered office segment, a bottom seemed to be forming.
In just one year, the CRE Activity Index recovered from its 4-year low point last December at 48.2 to 80.5 in November. It wasn’t the steady recovery many expected to see in 2024, but the progress was driven by an improving willingness by sellers to list properties for sale, a growing need for appraisals for new loans (particularly in Q3), and buyers coming off the sidelines to demand environmental due diligence in support of new investments. Over the past 12 months, the Index’s three components each increased over the prior month five times, and of these, three were in September, October, and November, which suggests that CRE velocity is ending the year in a much stronger position than one year ago despite some headwinds.
Monthly LightBox CRE Activity Index (November 2023-November 2024)
The Index’s performance over the past 12 months reflects the start of a thaw in the borrower segment as the modest dip in the cost of capital gave borrowers some incremental relief when it came to the sticker shock that came with loan quotes in 2023.
To be clear, borrowers and property owners weren’t popping corks at the end of 2024…. but there was some belief that the worst of the CRE storm was behind us.
On the lending side, for those with long-term patient capital and no mark-to-market pressure, the opportunities were plentiful. As one lender said, “We are able to obtain equity-like returns for many debt opportunities.”
Certain Property Types: Most of the headlines in 2024 were alarming ones and most surrounded the office market. (Those dire headlines were well deserved). If one were to look only at those headlines, one would think the CRE market was facing 2008 all over again.
But the truth is that most segments of the market continue to soldier on. While plenty of ink has been spent on multifamily foreclosures, most of that distress is limited to a small segment of the market—syndicators that paid top dollar in 2022, using floating rate debt and lofty rent growth assumptions. Distress in that market is real and significant. But for owners that used low-cost, fixed-rate debt on stabilized properties—the majority of the market—the distress has been extremely light.
In the industrial segment, there has been a leveling off of pricing from the impressive growth between 2020 and 2022, but big portfolios are still trading every week, and prices remain well above historical norms.
The worst seems to be behind lenders on the retail front. Non-mall properties were surprisingly resilient even during COVID as shopping centers and grocery-anchored properties defied expectations. Class B and C malls continue to be the black sheep of the segment, but at this point, all the risks are well-understood.
By the end of Q3, the dearth of properties available for investment that thwarted 2023 dealmaking was showing signs of a thaw. The volume of properties listed for sale in the LightBox RCM platform increased by 7% year over year, with the highest growth in industrial (14%), retail (11%), and multifamily (9%).
In a particularly encouraging success of 2024, the start of the rate cutting cycle in mid-September lured some investors off the sidelines to close nine-figure deals. Based on a recent LightBox analysis, there were 53 sales of $100 million or more in October alone, a sharp uptick from only 29 in September and 24 in August.
Setbacks
Frank Sinatra sang that his regrets were too few to mention, but that wasn’t the case for the CRE market. There are plenty of regrets for property owners and lenders in 2024.
Bond Yields: The halting and inconsistent nature of interest rate movements defined 2024. Several times during the year, the yield on the 10-year Treasury fell below 4% sparking optimism among loan originators, property owners, and potential buyers. During these periods, the bid-ask spread between property buyers and sellers narrowed and sales picked up.
In early 2024, and again in August and September 2024, bond yields experienced significant declines, with the 10-year Treasury yield bottoming at approximately 3.60% in mid-September. However, these gains were short-lived, as yields rebounded sharply, reaching nearly 4.5% over the subsequent two months. The erratic movement in bond yields created uncertainty, and an end to these “false starts” would be a welcome change in 2025.
For those hoping for a steady path to lower rates in 2025, disappointment may be ahead. During the December 6th episode of the LightBox CRE Weekly podcast, CBRE’s Spencer Levy shared a sobering outlook, suggesting that “higher for longer” rates could remain the dominant story in 2025, making it a “better, but not a banner, year” for the market.
Economic Data: Victory over inflation was declared countless times in 2024, but as the data revealed in late 2024, inflation was not giving up without a fight. Disappointing CPI and PPI numbers in the November report revealed that both numbers had started to tick up again (albeit slightly) and that both were settling in well above the Fed’s 2% target.
Those numbers gave rise to fears that the Fed would have to limit rate cuts in 2025. Some even suggested that Fed might have to (gasp!) raise rates in 2025 if inflation begins to accelerate next year.
On the November 22nd episode of the LightBox CRE Weekly podcast, we were on record as saying that the 50 basis point rate cut was a mistake—an opinion reinforced by the 80 basis point rise in the 10-year Treasury yield since then.
Rising Distress: Distress rates tend to be a lagging indicator for the market, but they can have a psychological impact. Distressed CRE loans climbed throughout the year and are likely to continue rising in 2025. (Remember, that peak CMBS delinquency rates did not take place for several years after the Great Financial Crisis of 2008).
The year underscored that even the savviest lenders and property owners were not immune to distress. Some of the biggest and most successful landlords were forced to throw in the towel on properties.
The problems were largely limited to two segments: office and multifamily.
- Office: The story is well known. The work-from-home watershed that came with COVID has changed the landscape entirely. Even though there has been a meaningful return to office in most cities, five-day-a-week attendance is rare. Accordingly, office demand is way down and thus so is pricing per square foot.
That has led to property values dropping more than 50% in many cities, where almost every major U.S. city has several examples of properties selling at a 75% discount to the previous sales price. This trend has sent office distress rates souring—and it may get worse before it gets better.
The pain has not been limited to obsolete class B and C offices, either. Even some NYC, Chicago, San Francisco, and Los Angeles landmark office loans have gone delinquent with lenders taking sizable losses in many cases.
If there was a (modest) silver lining to the office segment it was this: after several years of retrenchment from several of the big tech firms—Amazon, Meta, Google, and Microsoft—those stalwarts saw revived appetites for CRE space in 2024. - Multifamily: There was plenty to be concerned about in multifamily in 2024. Surging insurance costs put heavy pressure on net operating income. Supply and labor costs remained naggingly high. New supply put downward pressure on rents and the lofty expectations for rent growth that emerged during COVID did not come to pass. Potential distress in multifamily at the end of Q3 was $75.9 billion, surpassing office with $65 billion, according to MSCI.
In short, that meant that 2024 was a grind for most operators.
The good news—as noted before—was that for those with the wisdom to lock in fixed rate debt at low levels and for those that didn’t get caught up in the buying mania of 2021, buyer’s remorse was limited, and distress was contained.
Surprises
We would expect most CRE pros to say that 2024 played out very much as expected, if a little slower than forecast. Predictions from late 2023 suggested 2024 would see some modest improvements in sales and lending velocity thanks to rate cuts.
But the consensus was that 2024 would be another grind. And a grind it was, as rate cuts came later than expected; improvement on the inflation front stalled late in the year; and treasury yields oscillated higher and lower throughout 2024.
There were some surprises, however.
Most noticeable was in the office segment where property owners threw in the towel at an extremely fast clip. During the CRE depressions of the early 1990s as well as the GFC, transaction activity stalled for several years.
Not so in 2024. Even with the office market in a deep, deep depression, there were dozens of big-name, bargain-basement sales of major U.S. offices. The big surprise was that a reckoning and price discovery came so quickly for that market.
Despite predictions that office tenants would cut their footprint as leases expired, leasing activity in 2024 accelerated and even exceeded its five-year average in Q2 and Q3. While the general trend was reduced demand for office square footage, vacancies are plateauing in major cities across the U.S. CBRE is projecting that office vacancy rates will peak at 19% next year then decline to 8.2% in 2027, bringing them to pre-pandemic levels. As this happens, the evolution in office will continue to take shape.
Other surprises?
For months, many analysts were suggesting that bank failures over CRE were right around the corner. Some prognosticators believed dozens, if not hundreds of U.S. banks were set to fail due to CRE exposure. As of late 2024, the number was still just a small handful.
Another surprise was the regulatory tightening in response to mortgage fraud concerns in 2024 that placed a spotlight on government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac, which hold 22% of commercial/multifamily mortgages ($1.01 trillion), according to the MBA. With President-Elect Trump signaling interest in privatizing GSEs and reducing regulations, the future of these entities is uncertain going into the new year. Any changes to lending rules could have significant ripple effects across the CRE lending market, making Fannie Mae and Freddie Mac key players to watch in 2025.
Donald Trump, deficit cutter? One of the truths heading into the 2024 election was that neither party had the stomach to cut runaway U.S. spending. In his first term, President Trump was certainly no deficit hawk, so there was no reason to expect otherwise in Round Two. Yet with the nomination of Bessent as Treasury Secretary—and his desire to reduce the deficit by $1 trillion—the market may be pleasantly surprised. The alarmingly high U.S. debt—$35 trillion and growing—has been hanging over the bond markets and has contributed to the “higher for longer” U.S. bond yields in 2024.
As the door closes on 2024, the Fed cut rates by a modest and expected 25 basis points at its final meeting of the year. This third straight reduction brings rates down to their lowest level since February 2023 at a range of 4.25-4.5%. The forecast calls for a cautious approach to more rate cuts in early 2025, as the Fed watches the data for signs of the market response to this year’s actions. “There’s the risk that we move too quickly and undermine the progress we’ve made on inflation, and there’s the risk that we move too slowly and unnecessarily undermine the labor market,” noted Fed Chair Jerome Powell at the December meeting. Since the downside risks appear to be less in the labor market than with the threat of inflation, the Fed will likely be circumspect about lowering rates too quickly in its early 2025 decisions.
May there be more positive surprises in 2025. Happy New Year.
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