Reviewed by Ian Formigle
The rate-cutting cycle appears to be finally here, and the commercial real estate (CRE) market is showing signs of life.
For months, there’s been cautious optimism. Heavyweights like Goldman Sachs and Blackstone lined up capital1 for new loans and acquisitions. Sellers loosened their grip on long-held assets. Property prices crept up,3 slowly but steadily.
Still, without a rate cut, it was hard to get too excited. In a market as rate sensitive as CRE, many transactions needed cheaper debt to pick up steam.
Now, some investors are returning to CRE,4 drawn to a market potentially on the rebound. But thriving in this market isn’t just about looking forward—it’s also about learning from the past.
Here are three lessons every new CRE investor should take away from the downturn.
Lesson #1: COVID-19 Created Unique—and Unsustainable—Conditions
Global CRE investment hit a record $1.3 trillion5 in 2021—up 55% from the year before. What drove the sector’s rise? We believe a few things.
First, government stimulus and reduced household spending left Americans with excess savings. By mid-2021, U.S. households had piled up $2.3 trillion.6
Second, historically low interest rates kept financing cheap. CRE investments typically rely heavily on debt, and low rates can have a number of positive effects.
Third, demand for apartments hit an all-time high,7 just as new construction slowed during the pandemic. More renters competed for fewer apartments, which contributed to massive spikes in rents and rising property values.
We believe these conditions were exceptional—and unlikely to reappear in a typical market.8 That doesn’t mean CRE can’t thrive in the future, but it does mean we need to recalibrate expectations of “normal.”
Lesson #2: Commercial Real Estate Is No Single Asset Type
CRE is often talked about as a single asset type, but if the pandemic taught us anything, it’s that each CRE asset type behaves differently.
For example, office values tanked when remote work took off, while multifamily and industrial properties saw record performance in 2021 and 2022, according to Green Street’s Commercial Property Price Index.9
Sometimes, unexpected trends shake up CRE prices, like the recent AI boom fueling demand for data centers.10 Other times, asset classes can be sturdier—think multifamily housing or industrials, where demand generally rarely wavers.11,12
These differences played out during the downturn and will likely shape the recovery. For investors, the key is anticipating which assets are primed to perform—and which may still face a bumpy road.
For a deeper dive into various CRE asset classes and their demand drivers, check out this article.
Lesson #3: Interest Rates Make a Difference
For the typical homebuyer, real estate might mean a fixed-rate mortgage: lock it in at 3%, and you’re safe if rates jump to 7%. That is not necessarily the case in CRE. Many forms of commercial real estate are financed with floating-rate debt, so rate changes may affect existing loans.
Imagine your mortgage payment doubling between summer 2022 and fall 2023. That’s exactly what happened to many U.S. commercial real estate projects with variable-rate debt. Tools like interest rate caps can offer some protection, but they have limits: they’re usually set above the initial rate and only last two to three years. In the 2022–2023 rate environment, in many cases these caps simply fell short.
When rates rise, higher loan costs eat into profits and, at some point, potentially create a situation where the project can no longer afford to service its debt. After one of the sharpest rate-hiking cycles in recent memory, CRE investors have felt the pinch. But it goes both ways: when rates fall, borrowing costs decline. The knock on effect is that property values can surge. That’s why these cuts are such a big deal.
Entering a potential rate-cutting cycle could signal brighter days for CRE. But remember, events like presidential elections and geopolitical conflicts can quickly shift the economic picture—and rate cycles don’t always go as planned.
The key takeaway? Always keep a close eye on how macroeconomic forces and monetary policy shape this market.
Staying Savvy in a Growing Market
There’s a lot to potentially be excited about in commercial real estate, and new green shoots pop up frequently. But many feel unchecked expectations contributed to the recent downturn, and we believe fostering sustainable growth means remembering the hard-won lessons of the past two years.
We believe savvy investors will keep those lessons close as they consider what’s next.
CrowdStreet works with new and seasoned investors, offering them unique opportunities in commercial real estate. For more on the market and insights on our deals and process, check out CrowdStreet's U.S. Commercial Real Estate Investing Outlook H2 2024.
1 https://www.costar.com/article/1903479674/kkr-sees-2024-as-sweet-spot-for-real-estate-investing
3 https://www.greenstreet.com/insights/CPPI
5 https://www.cbre.com/insights/briefs/2021-global-investment-volume-hits-record-level
9 Green Street’s Commercial Property Price Index, November 2024.
11 https://www.globest.com/2024/08/19/multifamily-market-remains-resilient-amid-volatility-high-supply/
12 https://www.globest.com/2024/09/26/operating-fundamentals-improving-in-the-industrial-sector/
