Closing Statement
“The CRE market has reached an interesting entry point for new investment. Green Street data, excluding the office sector, shows the All Property Index has experienced slight increases in May and June after five months of stable readings. This comes after a period of decline from its peak on March 22 to December 23’. Additionally, the first half of 2024 saw the longest period of price stability in CRE, culminating in the first successive price rises noted since early 2022, marking the end of the previous real estate cycle.
With deal volume still low and our observation that some buyers remain hopeful of exerting leverage over a few time-pressed sellers, I’m observing the market gradually adapt to a new price equilibrium. In the short term, this may entail trudging forward without significant momentum in either direction from a pricing perspective. However, as the data points materialize, we continue to see them form a picture that suggests the foundation is forming for the beginning of a new real estate cycle.
As we search for new deals to bring to the Marketplace during H2 2024, we will anchor on three general themes outlined below:
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Reset Cost Bases
A defining theme for 2024, our review process will prioritize projects that offer significant discounts from their peak valuations and present compelling discounts to replacement costs. Where asset quality, market outlook, prudent financing, and pricing align, our strategy may be as straightforward as “buy low” and “avoid excessive leverage.” |
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Inflation
Inflation will likely continue to drive Fed behavior. To the extent it does, it will remain a focal point for us for the remainder of 2024. We’ll be watching for the monthly Personal Consumption Expenditures (PCE) report (reportedly the Fed’s favored inflation measure) and the Consumer Price Index (CPI) reports to continue trending downwards. Particularly as it relates to CPI, I’m optimistic that future measures of its shelter component (which makes up roughly 36%) may contribute to disinflation in the months ahead. My optimism stems from the 6-12 month lag between the readings used in CPI versus what is occurring in the market. When rents are no longer rising at above 5% annualized (which is the case today for various markets according to Zillow’s rent index and CoStar), I believe this data will eventually catch up and make its way into the inflation indexes tracked by the Fed.66 |
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Look to the 10-year Treasury
At the beginning of the year, I commented in my previous closing statement, “ …. if the 10-year treasury rate remains below 4% throughout the first half of 2024, I believe it may catalyze greater capital inflows which, in turn, may provide an additional stabilizing factor for pricing and potentially help fuel the CRE recovery.”67 I continue to stand by this statement. The 10-year treasury only briefly traded below 4.0% at the start of the year but then spiked to above 4.7% by April 2024.68Therefore, it never reached the sustained trading range I would look for to spur capital flows into real estate. With the 10-year rate back at roughly 4.2% (as of 07/15/24*), I’m still looking for signs of stability at or below 4.0% to help catalyze capital inflows. |
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Our outlook remains contingent on the US avoiding a recession or experiencing an exogenous shock. However, absent a meaningful spike in unemployment, we will continue to lean into the market and source deal flow that fits the current dynamic of high interest rates and a slow market. While the volume of deals may remain strikingly low in the immediate term compared to historical norms, we’re hopeful to see an increase in volume as we approach and, hopefully, move through a round of interest rate cuts.
