Advice for Property Owners: “Survive to 2025”

The commercial real estate market has been lacking for both stability and healthy fundamentals. It’s led to what the experts at the Counselors of Real Estate see as a defining trend for 2024: asset devaluation and a pricing reset.

As the Counselors’ global chair William McCarthy, CRE, sees it, the market will recover, but owners will need to “survive to 2025,” where they will find lower rates, stability and controlled inflation.

Resetting of Real Estate Values

In 2023, a wide bid-ask spread has stunted commercial real estate transaction volumes, but as loan terms come due and demand fundamentals weaken, many owners will need to adjust pricing. According to McCarthy, there is $1.5 trillion in commercial real estate debt that will come due by 2025, and interest rates are at a 21-year high. That will compel many owners to make difficult decisions.

“Owners have been in these circumstances for the last couple of years, and there is still uncertainty ahead, so there will be a little bit more narrowing of the distance between the two parties,” says McCarthy, who is also president of W. P. J. McCarthy and Company in Burnaby, British Columbia, Canada.

It’s hard to estimate where prices will bottom, and McCarthy says that the trough will vary based on asset class and location. Driven by remote work trends, office properties will see a greater pricing correction than multifamily or industrial. Urban core locations are also seeing a wider reset than suburban properties. Generally, multifamily pricing is down 8% to 10%, according to McCarthy, while office prices have fallen 30%. “These are generic numbers based on several surveys, but it just points out that prices are down significantly,” he says.

Strategies to Weather the Storm

Although asset values are resetting, owners can survive the market dislocation. “It’s really a micro game right now,” says McCarthy. “If you are looking at a specific business transaction, whether buying or selling, you really have to do a deep dive into the project or the transaction.”

Buyers will be testing the market to discover discounts, which involves placing low offers to see what sellers will take. He recommends that owners reassess valuations and investment positions weekly to curb the impacts of pricing volatility.

Portfolio repositioning is another opportunity for owners to survive the next year. Owners can dispose of assets that have reached maturity. Even if those sales fall short of expectations, there is an opportunity to buy at a discount to offset the difference.

“People are trading up or trading sideways on properties where they already have got the best rate of return and buying another asset that’s more conducive for their current portfolio,” says McCarthy. Investors can run sophisticated modeling to determine which assets have reached maturity and trade into properties that have more growth potential.

Finally, find a good partner to pursue opportunities and share the financial burden. Partnerships and strategic planning have never been as crucial, according to McCarthy, who says that investors with a strong track record, good communication, and financial partners will be able to realize their investment goals.

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