Signs of Stability – August 12, 2024
There are times in a recovery when little change is actually a positive sign. Green Street said as much in reporting its latest Commercial Property Price Index, interpreting the lack of month-over-month movement up or down as a sign of a stabilizing market. Now another California-based commercial real estate intelligence firm is conveying a similar message.
LightBox said its Monthly CRE Activity Index for July showed little change from June, despite broader economic volatility. July’s aggregate index came in at 92.4, nearly identical to June’s 92.3 reading, yet it represents a pronounced improvement from the July 2023 reading of 81.4.
The Irvine-based firm said that according to the report commentary, the latest improvement in the CRE Activity Index supports anecdotal evidence that the momentum that first took root in early 2024 continues despite recent disappointing data on job growth, unemployment and wages.
In July, “new CMBS issues and transactions continued, with lending spreads remaining stable,” the LightBox report stated. “A decline in Treasury yields provided borrowers with favorable conditions, and the expectation of a September rate cut by the Fed is bolstering market confidence. “
CRE dealmaking in July included “some well publicized news about distressed transactions continuing to filter through the market, some at significant losses, particularly with downtown office assets. Loan modifications are up, however, as well as loan sales which means fewer distressed assets are coming to market.”
The month also brought “encouraging signs of more portfolios changing hands, a healthy influx of bidders on individual property listings, and a new round of sales across asset classes and geographies,” according to the report.
An analysis of the LightBox data on nondisclosure agreements by asset class revealed that buyer interest in listings for multifamily and retail is above the national average across all property types. “As dealmaking builds steam, it brings more clarity to pricing and sends a powerful message to the market that prices are not likely to fall much more,” the report stated.
Across the broader macroeconomic landscape, “we saw high volatility” during July, “yet the CRE market continued to soldier on,” said Manus Clancy, LightBox head of data strategy. “Lenders are lending. Sales are taking place.”
As the LightBox team discussed in its CRE Weekly Digest podcast, “the market is looking past volatility to focus on closing the deals that make sense,” Clancy added. “The silver lining for the CRE market is that falling Treasury yields should support strong asset prices.”
The ability of CRE to exhibit resilience amid a disappointing round of market indicators and significant uncertainty is encouraging for the near-term forecast, LightBox reported. That said, the market isn’t out of the woods yet. LightBox noted that the market is just beginning to unravel distress.
“With the market now hopeful for what appears to be a likely September rate cut (and possibly another in November), momentum continues to build as the lackluster volume of commercial property investment, lending, loan divestitures, and distressed asset deals that characterized much of 2023 fades into the rear-view mirror,” the report stated.
Five months of steady increases in the LightBox CRE Activity Index are fueling cautious optimism. Whether August and September continue the trend remains to be seen. However, “if cap rates compress,” Clancy predicted, “we’ll see a real uptick in activity in the coming months because investors will not want to be left behind.”