Many in CRE want one thing for the holidays: a market bottom. It’s completely understandable. Owners, investors, developers, property managers, analysts, lenders, and others all want to look ahead with confidence that they can plan.
And it seemed like that was happening. There was a brief stabilization in the middle of 2024 based on MSCI’s RCA CPPI. However, CRE prices then fell for three straight months. September saw a 0.3% month-over-month drop — 1.9% year-over-year. That was even with a surety of optimism that the Federal Reserve would make an interest rate cut that ultimately was 50 basis points.
To see the bottom, buyers and sellers must find common ground and transactions need to start regularly. Until then, a general bottom is a wobbly concept and a half percentage point rate improvement, which will take some time to move through the financial system, isn’t enough of an incentive.
“You’re going to want to see 150 basis points over your financing costs,” Nels Stemm, a co-founding principal of Fairview Partners Investment Management, told GlobeSt.com. There is movement. “They’re starting to reestablish a spread between financing costs and the cap rate.”
Until then, it’s all about enough distress, or a good enough deal on properties with a strong financial future, to tempt capital back into the market. And if rates go back up — if there is a resurgence of inflation — “it’s probably not a great move,” Stemm adds. “The move from 2% to 3% is much worse than 5% to 6%” because it’s a bigger percentage change. “When you get to the very low end of interest rate, we’re loan buyers and we look at duration risk.”
Also, talking about a single bottom is unrealistic. As an example, multifamily and office have significant differences. Much of the former should be able to stabilize and recover, especially as expectations of a 2026 tightening of supply might happen. Office, on the other hand, is split into Class-A and trophy, which are doing well but represent only about 10% to 15% of the total inventory. The other 85% could have continuing big problems, making a bottom difficult to define.
Not surprising even more broadly, as CRE comprises many markets. Not just some major property types, but also geographic differentiations and different data sources available to measure a bottom. Averages are poor at measuring complex markets.
John Nicolini, managing director and senior consultant at Versus, told GlobeSt.com that the firm looked at NCREIF. “It was roughly flat in core real estate,” he said. “Prices seemed to have hit a bottom. We see transactions happening. Deals are getting done. Buyers and sellers are coming to an agreement on price. It’s not every sector, but the big ones that we talk about or have exposure to, prices have settled down here.”
The differences are a “few percentage points here and there” and not double-digit differences. “If prices continued to fall, that would tell me buyers and sellers are not agreeing in price and there’s a frozen market out there, and that’s not the case,” Nicolini says. “I’m rarely on the side of managers, but I have to agree with them here that it feels like a bit of a bottom.”
Plus, the structure of a bottom isn’t necessarily a single point that causes a rebound. A slowing then gradual deflection seems more likely. As does the need for more patience.