National CRE News In Your Inbox.
Sign up for Connect emails to stay informed with CRE stories that are 150 words or less.
How Investors Understand Today’s Real Estate Market
Suggesting that commercial real estate is in a volatile phase right now is a given. But do those involved with buying and selling CRE assets – the investors – view the situation? In a recent Marcus & Millichap video, Senior Vice President, National Director Research and Advisory Services John Chang discussed investor perceptions, among other topics.
Institutional versus Private Investors
There’s a difference in approaches between institutional and private. On the one hand, institutions continue on the sidelines as “many of them believe a wave of distress is still coming and that prices will fall by another 5% or more before the market stabilizes,” Chang said.
On the other hand, private investors believe that the market has bottomed out or “it’s at least close enough for deals to make sense,” Chang said, though the “bottom” depends on asset type, location and other factors. Additionally, larger private investors are putting deals under contract before the institutions hop back in. “They prefer not to compete with deeper institutional pockets,” Chang said.
Reality Sets In
Another interesting trend is that pricing reality is finally setting in. Chang indicated that sellers are coming to terms with today’s pricing standards. “We’re seeing more sellers price assets to fully engage the market rather than holding out for premium pricing,” he said.
Some of that is due to how banks are handling maturing loans. Though many lenders have had the flexibility to extend performing loans, they’re tightening up on the practice, especially as bank regulators work hard to clear maturing debt off bank balance sheets. Because of this, commercial real estate owners will either need to refinance maturing debt at current, likely higher, interest rates or sell their properties at the going market rate.
How Much Distress?
Then, there is the question about distress and delinquency rates. In analyzing numbers from Trep, Cred IQ and MSCI, Chang said that real estate debt and delinquency rates are elevated but not near the levels they reached during the Great Financial Crisis. “There is some distress out there, but it’s not severe,” Chang said that MSCI distressed sales were 3.9% of the total dollar sales volume in Q1 2024.
As a result, Chang suggested that distress levels are “more of a ripple than a wave,” with much commercial real estate pricing calibration already taking place. While there might be more to go on that front, “timing the exact bottom of the market is always exceptionally difficult,” Chang said. “You only know you hit the bottom after the fact when you’re looking in the rearview mirror. By then, it’s too late to do anything with the information.”
- ◦Financing
- ◦Economy
