What's Keeping $300B in CRE Cash on the Sidelines

There is a significant amount of capital on the sidelines waiting to be deployed in commercial real estate deals – estimates as high as $300 billion – but several factors are keeping it in investors’ pockets for now, according to a new industry news video by Marcus & Millichap.

If that capital is levered up with a 60% loan-to-value, that would be about $750 billion of commercial real estate sales volume.

John Chang, Senior Vice President, National Director Research and Advisory Services, Marcus & Millichap, said the first issue that is keeping it on the sidelines is the reduced amount of for-sale property on the market, partially driven by the expectation gap.

“Basically, sellers are still recalibrating their pricing expectations from where the market was in 2021 and early 2022,” Chang said. “The current market isn’t creating seller motivation.”

He said in 2021, it wasn’t unheard of for buyers to make big offers in the highly competitive market.

“Property owners would look at the offers and say, ‘Well, if you’re willing to pay that, sure, ‘I’ll sell it to you,’ ” according to Chang.

Today, no one’s tossing giant offers on the table, so sellers aren’t being motivated by price, and seller motivation is basically back to normal, Chang said.

“Property owners need a reason to sell their commercial real estate,” he said. “Those could include the end of a fund life, and investors need to tap into the equity of the property, the dissolution of a partnership or some other life or business reason to sell the property.

“On the other side of the equation, buyers have been holding back because of uncertainty and a belief that properties are still overpriced.

“I can’t tell you how many investors have told me the same thing over and over again: Prices are too high, cap rates are too low or they’re simply not willing to buy a property with negative leverage.”

Chang said those statements are a fallacy.

“If you knew a property’s rent was going to surge by 20% next year, you’d probably buy it, even if the cap rate today is 50 or 75 basis points below the prevailing mortgage rates, or if you knew that mortgage rates will drop by 100 basis points next year, you’d probably buy as much property as you could get because you could refinance when the rates go down,” Chang said.

“So, the argument that investors won’t buy a property with negative leverage really isn’t true. Investors won’t buy with negative leverage for two reasons.

“First, investors haven’t been willing to bet that interest rates will go down significantly next year, but interest rates could decline.”

Chang said if you look at the most recent Federal Open Market Committee dot plot of expected interest rates, most of the FOMC voting members indicate that the overnight rate at the end of 2024 should be 25 to 100 basis points below the rate at the end of 2023.

The second barrier buyers face, he said, “is that they aren’t focusing enough attention on value creation strategies. Creating value in property is a cornerstone of commercial real estate investing. Investors who can look at a property and find potential upside opportunities are the ones doing deals today and they’re the ones who are getting the jump on the market.”

Given there’s $200 billion to $300 billion of capital out there waiting for market clarity, Chang said, “When that clarity comes and all that money jumps back into the market, the competitive investment landscape will be dramatically different from what it looks like today.”

He said investors might want to take a minute and consider whether they think interest rates will go up or down next year and they need to look at the properties that are available today and determine if any have value-creation potential.

“Investors shouldn’t lock into the economic and financial conditions of today,” Chang said. “They should focus on where the market will be in a year, two years, or five years.”