CRE Index Shows Market is Ready to Move

Is the CRE sector’s torrent of troubles on its way to becoming a distant memory? Maybe not immediately, but there are signs that the current is changing direction and leaving the shoals of the past behind.

August was a month that confronted CRE players with conflicting economic signals, an uncertain labor market and concerns about consumer spending.

But the sector is heading into a strong September and a fourth-quarter following the Fed’s announcement of its planned rate cuts, according to Lightbox’s monthly CRE Activity Index for August, which measures shifts in property listings, valuations and environmental due diligence.

The index fell to 89.9 in August, 2.5 points below July, interrupting a five-month trend of steady but modest increases. “The volume of properties listed for sale declined moderately, as expected,” Lightbox reported.

However, it considered the decline neither concerning nor surprising. “More telling (and more promising) is that August’s index landed a solid nine points above this time last year when the Index sat at 80.9. This year-on-year uptick reflects strong improvements in all three components of the index outperforming activity in last year’s more tepid market,” the report stated.

It anticipated the index would rise steadily as the first round of rate cuts is absorbed and CRE investment and lending rise – pointing to opportunistic investors already on the lookout for active assets.

“CRE transaction activity has inched up every month since March and despite a small (and expected) dip in March, the buyer base is expanding, interest in evaluating opportunities is rising, and recent acquisitions have surfaced across all property types and geographic regions,” the report commented. “Signs of a market mobilizing to address what could be a dramatic transfer of assets are evident. Recent dealmaking cuts across all asset classes and all geographies.”

The report cited increases in the number of non-disclosure agreements per property, particularly in the multifamily and retail sectors. It also noted pent-up demand for properties that are performing. Even in office, it said the transferring of assets has already begun – some from forced sales, some from institutional investors that want out, and others from opportunistic private equity buyers.

Distressed property transactions remain low though increasing. “With each passing month, the reality of the challenges associated with maturing loans comes into sharper focus,” it noted. For owners and lenders, this means deciding whether to refinance with a significant capital infusion, seek a loan extension, or force a sale. Foreclosures remain low.

At the same time, traditional CRE lenders want to minimize their risk exposure and remain cautious about new loan originations. “Private equity debt lenders and life insurance companies are ramping up and moving in to fill the bank lending gap.”

Once the rate-cutting phase gets underway and investors sense the window of opportunity is open they will begin to deploy capital quickly if the current recovery follows past patterns, the report said.

Nevertheless, it acknowledged dark clouds could overhang the near-term forecast. Softening of the labor market would suggest a possible recession. Retail sales numbers indicate that consumer spending could be losing steam. These are issues the Fed will be watching, along with higher prices, a spike in layoffs, or a decline in job listings, the report noted.

Absent such trends, the index reflects “the underlying strength and resilience in the market, built on the foundations of growing momentum, all in the midst of unpredictable jolts of volatility in the broader economy,” the report said.