CRE Optimism Wanes as Treasury Uncertainty Drags Deals
The office sector is tying up investment capital.
Recent optimism that the CRE investment market had hit bottom and was primed for a rebound has begun to wane within the past few weeks as a backup in the Treasury has essentially paused dealmaking.
Yields on 10-year Treasuries have recently increased on stronger-than-expected economic data, causing uncertainty about future rate cuts. While CRE investments won’t grind to a halt, investors are pausing to evaluate how much rates might continue to drop and at what pace before they commit to new deals, said Madison Realty Capital co-founder Josh Zegen during an interview on Bloomberg TV.
“It’s very hard for investors to make a market between a 3.5 and a 4.5 Treasury,” said Zegen. “They really need more of a tight band with four to six months of consistency to start committing to new deals, and that’s a real challenge for the sector in general.”
Zegen noted a pause is healthy for the system. Deals that are getting completed today are often old deals that need to be recapitalized so projects can be completed. New construction starts are happening and many asset classes are supply-constrained, which bodes well for future dealmaking.
However, one of the problems investors face right now is money isn’t coming back from previous investments so it can be reinvested in new deals. The office sector, in particular, is tying up capital, said Zegen.
“You can sort of make a market in multifamily and other more liquid asset classes,” said Zegen. “But the challenge is, you have such a structural change in where investors are investing, and given that office made up 15% to 30% of investors’ and banks’ credit, that’s a real challenge. Money is not going back as freely as you would have thought.”
The perception that now is the time to invest in office assets that are trading for pennies on the dollar is tricky.
“They’re not being bought for office,” said Zegen. “They’re being bought for knockdowns. They’re being bought for residential development and other. Class A will survive, albeit at a higher cap rate than maybe two years ago.”