Green Street Still Expects a Soft Landing for CRE

Green Street’s latest outlook for US commercial property isn’t completely glum, but it’s far from a happy place, or a clear one.

It starts with the overall national economic climate. As the firm wrote, “A soft landing for the U.S. economy was expected; life got in the way.” Inflation hasn’t fallen the way the Federal Reserve expected and there is high uncertainty of what will happen. A forecast for where GDP would go three weeks ago is “likely too rosy.” The banking crisis is having a negative impact and a greater decline in GDP and in employment are likely, they say. But “investors are clearly not freaking out,” which should help stabilize the situation. The firm still expects a soft landing.

Meanwhile pricing continues to drop following their peak a year ago. Office prices are down 13% since Green Street’s early December 2022 sector report and at least 25% since the peak. A number of other property types have also seen a decline in prices: healthcare, multifamily, manufactured homes, life science, and strip center retail, all under 5% off. Balancing that are a few types seeing similarly modest changes but in the other direction. Mall, cold storage, industrial, tower, lodging, and self-storage were up a bit.

Market Revenue per Available Foot, or M-RevPAF, is a Green Street metric that combines changes in both rents and occupancies. M-RevPAF growth is slowing but the firm still forecasts average growth of 3% for this year. That varies widely by category, with office and self-storage expected to see -2% growth, while industrial, manufactured homes, and data centers to see a climb of 7%.

Given tighter financing and lower prices, building starts aren’t likely to add enough supply to undermine the expectations.

Overall, there is a wide bid-ask spread—sources had been telling GlobeSt.com that with lower transaction volumes, price discovery would continue to be difficult to obtain. “Best estimates put property prices circa 15% lower than their March ’22 peak,” Green Street wrote. CRE properties are about 10% more expensive than long-term investment-grade corporate bonds and REITs are below private values by about the same amount.

Expect more drops, though. And even with higher M-RevPAF, costs are much higher and NOI growth will be low: from just under 2% for life science to a more than 4% drop for lodging. “Industrial rent growth is not expected to slow as much as previously forecast; NOI growth revised higher as a result,” Green Street wrote. “Life science and data center also revised up. Single-family rental NOI for next year is lower, but the long-term outlook is just fine. Lodging NOI missed our forecasts in ’22 due to weather damage and expense pressures; the latter will weigh on ’23 as well. Office fundamentals are even weaker than was forecast.”