How to Buoy 2024 Until Interest Rate Cuts Come
This year could be one in which ‘CRE can reimagine and redefine what a product can look like,’ says Crexi.
Everything changed for the commercial real estate industry in the Fed’s December meeting, when it telegraphed the chance of three interest rate cuts in 2024. Crexi immediately noticed an impact on its platform.
“This positive news stirred buyers in the cold winter, encouraging pricing on [our] platform to start climbing across most asset classes in Q4,” they wrote in a new report. “We’re not out of the woods yet, as debt financing will remain less available until banks’ appetite for lending returns.”
In the meanwhile, three different factors will help bridge the gap until that day comes, it said: cash, corrections, and creativity.
The first factor, cash, comes into play in two ways, “whether with cash in hand or pursuing financing options,” even as “days of free money are gone, and debt financing will remain tricky and costly into the new year.” So long as capital is available, the market can move forward. Some lenders “saw the busiest December for conduit loans in four years, with much origination from borrowers who wanted to take advantage of better interest environments than earlier in 2023.”
Next, corrections. It hasn’t been fun for investors, developers, and owner. Major valuation changes have upturned loan LTVs, shaken loose financial plans, and made business as usual tough. But there has been a broader good side, Crexi said. “The corrections the market has experienced thus far are a healthy part of overall cycles, a period where CRE can reimagine and redefine what a product can look like.” The jarring has set the stage for different approaches in the industry that will work under developing conditions.
“These creative forces will forge a new and more diversified space,” they said. “Mixed-use assets, special-purpose properties, and even amenity-rich offices are seeing growing demand from tenants willing to spend the capital on quality-of-life and adaptable spaces. And the basis reset will do much to restore overall confidence in the sector, pulling waiting capital off the sidelines and onto the playing field.”