Second Quarter Capital Markets: Sluggish, With Bright Spots

It goes without saying that commercial real estate capital markets are going through a seemingly ongoing volatile period. Q2 numbers and commentary from CBRE and Newmark report little change in fluctuations, but there were some beginning signs of stabilization.

Transaction Volume: Ongoing Decline, But . . .

CBRE’s Capital Markets & Lending and Newmark’s State of the U.S. Capital Markets reports agreed that overall CRE transaction volume declined in Q2. CBRE analysts commented that investment volume increased by 14% QoQ to $86 billion, down 3% from the previous year. In breaking down investment volume by asset type, Newmark commented that multifamily had its best quarter since Q4 2022 and was down by 1% YoY. Meanwhile, Newmark analysts noted that hospitality took a beating, with sales down by 35% YoY.

Both reports indicated that multifamily led the way in Q2 investment, totaling $38 billion (according to CBRE). Meanwhile, industrial investment volume fell by approximately 18% year over year. Interestingly enough, Newmark pointed out that office transactions were up by 4%, while CBRE reported a year-over-year decline of 21.3%.

Debt Markets: Banks Hesitate, Alt Lenders Step In

Newmark and CBRE analysts agreed that:

• Origination volume from banks declined in Q2

• Alternative lenders stepped in to take the lead

Digging more deeply, Newmark suggested that while overall debt original activity was constrained in 1H 2024, there are signs of a potential bottom. Bank lending fell sharply as “regional banks face a protracted deleveraging from CRE,” the Newmark report said, adding that the market is facing an absorption of $2 trillion in debt maturities between 2024 and 2206.

Meanwhile, CBRE said that alternative lenders “were the top non-agency group, with a 33% market share in Q2.” Among this group, debt funds increased their origination volume by 71% year-over-year, CBRE analysts added.

Both reports also commented that securitized markets are also stepping into the breach, with an increase in CMBS issuances. Also in the mix were the Life Companies. CBRE analysts commented that LifeCos accounted for 30% of closed non-agency loans in Q2 (a 27% year-over-year increase), while Newmark experts said that LifeCos increased their issuances by 10% in 1H 2024.

Bonds: The Spreads Narrow

The Newmark analysts commented that lower corporate bond yields (due to lower inflation and cooler labor markets) improved mortgage bond spreads. On the other hand, Newmark said that “both in the private and public markets, cap rates appear distinctly unattractive, relative to the cost of debt capital,” with the possible exception of office REITs.

Meanwhile, the benchmark Treasury yield continued to fall “amid signs of a cooling U.S. economy and labor market,” CBRE explained. Newmark added that it anticipates that “an equilibrium federal funds rate of 3.0% or greater” would “anchor long-term Treasury yields in the mid-3% range even after the Fed has normalized its policy stance.”