A Difference of Opinion – March 11, 2024
Going by CEOs’ comments on the recent fourth-quarter earnings calls of the major publicly traded commercial real estate services firms, the consensus is that 2024’s second half is expected to represent a substantial improvement in transaction volume. As a Trepp posting pointed out last week, the analysts at London-based Capital Economics aren’t of the same opinion.
“Investor and lender sentiment has improved and we anticipate this will lead to increased transaction volumes, starting in the second half of the year when short-term interest rates are expected to fall,” CBRE CEO Bon Sulentic said last month.
Against this backdrop, Sulentic said on the company’s Feb. 15 earnings call that the company expects to achieve core EPS of $4.25 to $4.65 in 2024, “implying mid-teens percentage growth at the midpoint of the range.” He added, though, “This broad range reflects the difficulty in predicting the precise timing of a recovery. It is notable that any outcome in this range would still be well below the long-term earnings potential of CBRE.”
Similarly, Hessam Nadji, president and CEO at Marcus & Millichap, said on a recent call, “We’re cautiously optimistic for an improving market environment in the second half of this year.” JLL’s Christian Ulbrich and Newmark Group’s Barry Gosin offered comparable projections.
Looking specifically at the U.S. market, Capital Economics’ Charlie Cornes and Kiran Raichura see near-term headwinds following a year of double-digit volume decreases. “Commercial real estate investment saw its worst year in over a decade last year,” they wrote last week. “Most brokers seem to expect a recovery in investment activity this year as the Fed cuts interest rates and distressed assets come to market. However, we think the effect of both of these may be overstated, and that a particularly difficult H1 will prevent investment activity from seeing a meaningful recovery in 2024.”
Cornes and Raichura cited the Federal Reserve’s uncertain timetable on lowering interest rates as a major stumbling block for the first six months of the year. They pointed to the latest comments from Fed officials which suggest that rate cuts won’t begin until at least June, leaving interest rates at their current elevated level for the time being.
“We expect the 10-year Treasury yield will therefore stay elevated above its early-2023 levels,” they wrote. “And though valuations continue to improve as cap rates rise, we don’t think that will drive a pickup in investment activity in H1. Indeed, we expect investment in H1 2024 will be worse than the same period a year prior.” Given that transaction volume in H1 2023 was down 54% from the year-ago period, that’s saying a lot.
The Mortgage Bankers Association recently said the current year is expected to see a record-high $929 billion of maturing CRE debt after many loans set to mature in 2023 were extended into 2024. “While some of these could be extended into 2025, we think more lenders and investors will bite the bullet this year,” wrote Cornes and Raichura. “But with values having yet to bottom out, we don’t expect this to bring about a substantial increase in activity in the next couple of quarters.”
All of which underscores the meaning of a mantra that has been circulating in recent months, itself based on a rhyming mantra popularized by the late Sam Zell in the 1990s: “Stay alive ‘til ‘25.”