The investing world has shapeshifted after 11 interest rate hikes by the Federal Reserve to curb high inflation - a mission that, in Jerome Powell’s words, is still ongoing but “eased from its highs.”1 Although we haven’t seen another rate hike since July 2023, the residual effects are lingering, with strict lending standards, debt capital not nearly as readily available as before the rate hikes began, and commercial real estate (CRE) assets that are repricing and adapting to the post “free-money” era.
However, the outlook for interest rates is improving, and we’re beginning to see its effects on the CRE market. Following the Fed’s latest guidance in December, the market has moved beyond the concept of further rate hikes and is now debating the timing and velocity of rate cuts.1 Although no one can predict the timing and impact of anticipated rate cuts, this pivot has helped remove a nearly two-year-long market headwind. Market behavior is changing and showing signs that there may be a window of opportunity before the descent.
Data from Green Street shows that CRE prices have declined, on average, by 22% since the Fed’s first rate hike in March of 2022.2 We have observed that the recent asset repricing has created opportunities for significant discounts in select pockets nationwide compared to their valuations prior to the interest rate hikes. Therefore, in H1 2024, we are looking for opportunities that are adequately discounted from their peak values, particularly in locations where market fundamentals remain intact, with an outlook that supports positive net absorption. For development deals, we are seeing certain opportunities that were previously stagnant now resurrecting in the face of improving debt terms and some alleviation in land cost premiums.
While we locate these projects, our rent growth assumptions based on market data and used in evaluating a business plan in H1 2024 will remain moderate, soft, and in some cases declining, keeping in line with CoStar Group’s latest data, which varies depending on the underlying market fundamentals, tenancy, and property type.3 Despite changing market sentiment and an improving outlook for interest rates, CRE transaction volume is still muted relative to its historical average.4 As a result, we expect CrowdStreet Marketplace deal volume to remain low in H1 2024 relative to our historical volume. However, we are cautiously optimistic that we may see some acceleration of market clearing activity later this year as markets further adapt to the changing environment. For those deals that do launch on our Marketplace, a discounted basis on acquisitions will be a commonly targeted theme for us.
As trends in this economic environment evolve, we closely monitor interest rates, inflation, and other economic indicators to keep you updated. Our H1 2024 report incorporates industry knowledge and thorough research to construct our outlook and opportunities across various CRE asset classes.