Chapter 04

Closing Statement


With CRE prices down last year, debt markets still in a state of disarray, and what feels like a near certainty that a recession is in store, it would be logical to have a bearish outlook. Instead, I see an environment where a strategy of patiently scouring the market for mispriced opportunities could lead to upside scenarios later this decade. And most of the ‘why’ is summed up in the maxim, ‘Things are rarely as good or as bad as they seem at the time.’
Ian Photo
Ian Formigle
Chief Investment Officer
CrowdStreet Advisors

The whirlwind of events over the past few years has led us to a market dynamic that has completely transformed the CRE investing space, from both a lending and pricing standpoint. It’s been more than a year since the Fed frantically started raising interest rates to extinguish the flames of high inflation. In that effort, the capital markets, which are the bloodline of CRE transactions, have come to a near standstill. First quarter 2023 transaction volume was down 56% year-over-year, according to MSCI Real Capital Analytics, and we have likely not witnessed the bottom from a velocity standpoint.

Figure 13: Commercial Real Estate Transaction Volume by Quarter
Figure 13

Source: MSCI Real Capital Analytics, Q1 2023.

Figure 14: Commercial Real Estate Transaction Volume by Year
Figure 14-1

Source: MSCI Real Capital Analytics, Q1 2023.

In today’s market environment:

Debt financing for CRE will likely remain scarce for the remainder of the year.

Many lenders continue to stay on the sidelines and underwriting standards are arguably as stringent as they were coming out of the Global Financial Crisis (GFC). To the extent that debt financing is available, it is punitively expensive. While high levels of friction in deal making are likely to persist in the immediate future, it does create niche opportunities for creative financing such as private senior debt, middle tranche solutions such as mezzanine debt and/or preferred equity, and scenarios to avoid an undesirable transaction market altogether through recapitalizations.


It’s bargain shopping season.

The CRE market is reverting back to the mean from a pricing standpoint. Prices have declined considerably from their March 2022 peak (Green Street states it as down ~15% from its peak, as of May 2023) since the Fed started raising interest rates. Many projects are at a discount to peak pricing. Absolute troughs are only known in retrospect but pricing for multiple sectors currently stands below its 25-year trend as discussed in my March memo.


The overall market is in financial distress but remains largely removed from operational distress, except for the office sector.

Underlying fundamentals for most CRE asset classes remain intact but are at moderate levels relative to the strong growth that the market experienced in 2021. Currently, among other major CRE asset classes which include retail, multifamily and industrial, office is the only asset class that, according to national data by CoStar, is expected to experience negative rent growth for the next three years as it is in a uniquely devastating recessionary cycle of its own.

The remaining major CRE asset classes in CoStar’s forecast are expected to show positive rent growth during that time. In comparison, from 2008 to 2010 during the GFC, every other major CRE asset class with the exception of multifamily experienced three years of negative rent growth. As for occupancy levels, according to Costar, the industrial and retail sectors may remain above long-term averages while multifamily is expected to experience a one-year spike in vacancy in 2024, then to trend upward by around 2026.

With that said…

We are assuming tempered future rent growth projections with slightly higher vacancy assumptions. But overall, the outlook suggests moderate continued demand for CRE.

While uncertainty remains, depressed levels of transaction volume and institutional investor activity can often benefit private investors. A relative scarcity of equity capital in the broader market is compelling operators and developers to offer private investors the types of deal structure incentives we haven’t seen since the depths of the pandemic. Such incentives can include increased percentages designated for preferred returns (before a disproportionate share of profits kicks in for the sponsor), increased splits to limited partners above preferred returns, reduced fees to sponsors and, in certain instances, profits participation with the sponsor. 

The dry powder is out there, but it is currently on the sidelines. Once institutions re-enter the market in force, I anticipate that it may lead to a normalization of deal terms and an end to the dynamic of exceptional investor-friendly structures.

Overall, these transition times can provide a window of opportunity for private capital to invest as the large pools of institutional capital sit and wait for continued data to support a market recovery. While fewer in number, the deals that do transact in 2023 may prove to be relative values in the years ahead.

Ian Formigle

Chief Investment Officer of CrowdStreet Advisors

About the Author

Ian Formigle is the Chief Investment Officer for CrowdStreet Advisors. He has more than 25 years of experience in real estate private equity, startups, and equity and options trading. 

Ian is a respected industry thought leader who serves on ULI’s Redevelopment and Reuse Council and has served as a contributing author to 

Ian attended the University of California at Berkeley where he obtained a Bachelor of Arts in Economics and a Bachelor of Arts in Political Science.

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