MSCI: CRE Prices Slump Into Q4, Yet at Slower Pace

November saw a 60% annualized drop, bringing 2023’s transaction volume to $323.8 billion, a 55% decrease from 2022.

MSCI: CRE Prices Slump Into Q4, Yet at Slower Pace

November saw a 60% annualized drop, bringing 2023's transaction volume to $323.8 billion, a 55% decrease from 2022.

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Good morning. Hope everyone celebrating had a nice Christmas. We’re back and well-rested to wrap up the year! Stay tuned for our year-end letter dropping this Sunday on what’s next for CRE Daily.

In today's issue, we delve into MSCI's latest report indicating another year-over-year drop in CRE prices for November, though the pace of the decline appears to be slowing. Additionally, Fitch Ratings forecasts a bleak credit outlook for the commercial real estate sector through 2025.

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Commercial Real Estate Prices Slumps Into Q4, But Hope Is On The Horizon For 2024

In the words of analysts at MSCI Real Assets, “the commercial property markets are not roaring into the fourth quarter.” That’s the big takeaway from the company’s recent U.S. Capital Trends report.

Mixed bag: Both October and November witnessed substantial YoY declines in commercial real estate transactions. November's deal volume dropped by 60%, bringing the YTD total to $323.8 billion, a 55% decrease from the previous year. On a positive note, The RCA CPPI National All-Property Index dropped 8.0% from a year ago, representing a narrowing of the annual declines seen at midyear. Compared to October, prices were flat, an improvement on the month-over-month drops of nearly 2% at the start of 2023.

Major decline: Every major asset class saw a decrease in deal volumes. Multifamily and industrial properties, which previously exhibited resilience, reported dramatic declines of 68% and 64%, respectively, compared to November 2022. The office sector, still recovering from pandemic impacts, experienced a 54% decrease in transaction volume, with Central Business District (CBD) office spaces facing a steep 76% yearly drop in sales.

Retail resilience: Unlike other sectors, the retail sector demonstrated relative resilience, albeit in the context of the overall decline. Despite being the best performer in terms of annual sales growth, retail still faced a 32% decrease in transaction volume compared to the previous year.

Year-end recovery unlikely: A significant rebound in December sales would be required to end the year on a positive note, with an almost improbable target of $110 billion in sales, a feat only previously achieved in December 2021 during the peak of pandemic-era transactions. This scenario seems highly unlikely.


Hope on the horizon: The current state of the commercial property market is partly attributed to the inherent timeline of real estate deals, which tend to have a long gestation period. Deals closing now were likely negotiated months earlier under different economic conditions, including concerns about mortgage rates. There's growing optimism due to changes in the Federal Reserve’s monetary policy, but it's expected that the positive impact of these changes will only be visible in commercial transaction data by 2024 or later.


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  • Heading West: Florida real-estate developers launch a $1 billion hotel and residential project in the Rocky Mountains.

  • Zoning reforms: Austin and Arlington adjust zoning laws to increase housing density per lot for affordability.

  • Office rents: CBRE's analysis shows a 1.2% decrease in Class A+/A office rents and a 3.9% fall in Class B/C since 2022.

  • Retail hotspot: NYC's Fifth Avenue remains the most expensive retail area globally, attracting tourists, surpassing Milan's Via Montenapoleone.

  • Price surge: U.S. home prices reach new highs, rising for nine months straight due to limited supply and robust demand.

  • Bank cuts: Over 60,000 job cuts in the global banking sector in 2023, reflecting reduced fees and profit preservation efforts.

  • Tropical sale: Levine Leichtman Capital Partners aims to sell Tropical Smoothie Cafe for about $2 billion, valuing it at 20 times its annual earnings, with a sale process starting potentially in January.

  • Housing boost: The FHFA has authorized Fannie Mae and Freddie Mac to invest up to $1 billion each in low-income housing tax credits annually, starting in 2024, to support affordable housing initiatives.

  • Downturn: The Aon Center in LA, the city's third-tallest tower, sold for $147.8 million, 45% less than its 2014 value, reflecting the impact of high vacancies and rising financing costs on office property values.

  • Land deal: PulteGroup has purchased a 43.6-acre farmland in Palm Beach County for $30.32 million to develop Greyhawk Landing, a community of 131 single-family homes starting in the $700,000s, marking a significant real estate investment in a rapidly growing area.

  • Credit downgrade: S&P Global Ratings downgrades Brookfield Property Partners to 'junk' status, citing debt and occupancy issues.

  • Cyber attack: First American Financial experienced a cyber attack, leading to its website and several systems shut down. If you have escrow set to close and underwritten by FA, you will not be closing this year…

  • Luxury retail: Prada, after suing its landlord Jeff Sutton in 2019, has now bought two buildings, 724 and 720 Fifth Avenue, for a total of $835 million, with the deals for its flagship property and the neighboring building being reported at $425 million and $410 million respectively.

  • Breaking ground: Wells Fargo financed $360 million for the first phase of New York City's largest 100% affordable housing project in 40 years.

  • SF reset: San Francisco's 33 New Montgomery St. office tower is on sale for $80 million, 46% less than in 2014, mirroring wider issues of high vacancies and lending costs in the Bay Area's real estate market.


Fitch Says Office Real Estate to Spearhead 2024 Downturn in US Commercial Property Market

According to Fitch Ratings, the credit outlook for commercial real estate is expected to decline through 2025. And guess which sector is at the forefront?

Credit trends: Fitch expects U.S. CMBS property net cash flows, particularly in office and non-trophy malls, to decline sharply due to macroeconomic challenges and rising interest rates, leading to more defaults. They forecast U.S. CMBS loan delinquencies to double from 2.25% in November 2023 to 4.5% in 2024, reaching 4.9% by 2025.

Rising delinquencies: November saw the U.S. CMBS office delinquency rate rise to 3.48%, the largest increase since June 2020, with a notable portion of the $1.59 billion in new 60+ day loan delinquencies coming from office and multifamily sectors. Delinquencies in these areas are expected to escalate further in the coming years.

Leading the decline: The office CRE market, especially in central business districts with older properties, is facing significant challenges due to the shift to hybrid working. This shift has led to a reset in valuations and made refinancing more difficult. A continued decrease in net operating income is expected for office properties in 2024, particularly affecting lower quality urban offices.

Zoom in: The national office vacancy rate has increased from 9.5% at the end of 2019 to 13.5%, with total availability reaching a record 16.6%. Fitch projects a further increase to 15.7% by the end of 2024 and 16.6% by 2025, accompanied by a decrease in market rents.

Zoom out: Leading metropolitan areas with vacancy rates surpassing the national average include San Francisco (20.3%), Houston (19.2%), Dallas/Ft. Worth (19.0%), Chicago (16.1%), Washington DC (15.8%), Los Angeles (15.6%), and New York (15.1%), with most also experiencing a decline in average transaction sales prices. Since mid-2022, Fitch has increased office capitalization rates by an average of 100 basis points for B grade and lower properties.


Possible silver lining: Interestingly, Fitch notes that U.S. life insurance companies with significant CRE investments will likely remain resilient despite current market challenges. Their investment strategies, focusing largely on commercial mortgages and minimal exposure to CMBS, combined with conservative underwriting and diversified portfolios, position them well. They are expected to have sufficient capital to absorb higher losses, showcasing their strength across multiple economic cycles.


🎧 LISTEN: One of our favorite podcasts this year has been Weiss Advice. Here are the top 20 most downloaded episodes with their titles.

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Since we took a few days off for the holidays, today we are sharing two charts from Deloitte’s 2024 commercial real estate outlook report.

Globally, rising interest rates and high capital costs are key concerns impacting financial performance in the next year. Notably, the focus on cyber risks has surged, especially in Europe, due to the real estate sector's growing use of smart technologies. In Asia/Pacific, short-term liquidity issues are the primary worry.

Another interesting chart from the survey shows the highest number of respondents expecting a decline in real estate conditions since 2018. Two consecutive years of revenue decline, cost-cutting, and tighter operations lead to concerns about worsening leasing fundamentals and property pricing. Some believe the real estate capital markets may be near a market bottom.

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