US CRE anticipates opportunities in 2024 - Capital raising ramps up

Sentiment among investment groups targeting US commercial real estate is swinging in a more positive direction

Results from Altus Group’s Q1 Commercial Real Estate Industry Conditions and Sentiment Survey captured a surge in confidence that could propel more deal-making ahead in the coming year.

The share of respondents that selected deploying capital as their primary focus over the next six months surged from 7% in Q4 2023 to 25% in Q1 2024, while the share citing plans to raise capital also climbed higher from 17% in the previous survey to 22%. Although managing existing portfolios/exposures remains the priority for the largest number of respondents at 42%, that percentage declined from 57% in the Q4 survey.

Figure 1 - What do you think your team's primary focus will be over the next 6 months?

Bigger appetite to buy

Following a slower pace of transaction activity in 2023, nearly one-fourth of respondents said they plan on being net buyers over the next six months, which is up markedly from just 2% in Q4 2023. Those who stated that they would acquire new assets increased from 21% to 32% compared to the prior quarter.

The increased interest in buying could be due to a combination of factors, including expectations that investors will find better buying opportunities and more positive views on the ability to access capital ahead. Although a majority of respondents view multifamily, office, and land as still being overpriced, there is a slight shift in favor of assets being more fairly priced. In particular, more respondents now view hospitality, retail, and even industrial as being fairly priced.

Figure 2 - Over the next 6 months, do you anticipate any transactions in your portfolio?

Capital is still accessible

Despite a barrage of headlines around higher for longer interest rates and tightening liquidity, survey results showed that investors are more confident that the cost and access to capital will improve over the next 12 months. A majority view equity as being at least somewhat available across a variety of different sources. Although investors still have a bearish view on the availability of debt, there was a significant improvement in expectations for the availability of capital across each capital source when compared to the Q4 survey.

• Securitizations (CMBS and CRE CLOs) saw the biggest move in quarter-over-quarter (QoQ) sentiment. 55% of respondents to the Q4 survey said these debt vehicles would be “not at all” or “not very” available over the next 12 months, but just 40% said the same in the Q1 survey.

• Respondents continue to have an unfavorable view of the availability of bank financing with about half (52%) who think it will be “not at all” or “not very” accessible, but that sentiment is more favorable compared to 64% in the prior survey.

  
  

Figure 3 - What are your expectations for the availability of capital over the next 12 months?

Brighter outlook on key metrics

The CRE Industry Conditions and Sentiment Survey takes a forward read on the market by asking stakeholders how they think key metrics are likely to change within the next 12 months. Results showed increased general optimism: respondents believe capital will be more available, the costs of said capital will decrease, there will be an increase in attractive investment opportunities, and there will be an accompanying uptick in transaction activity.

Nearly two-thirds of respondents expect to see an increase in attractive investment opportunities within the next 12 months, up from about half in the Q4 survey. Potentially, that sentiment could be due to a narrowing pricing gap between buyers and sellers. That response also could be influenced by anticipation of stress in the market from loan maturities. Similar to the Q4 survey, a majority of respondents expect to see an increase in distress in the coming year.

• Respondents appear more confident that there is greater stability ahead for capital markets within the next 12 months. 72% of respondents have a favorable view of their potential cost of capital, with 45% who think the cost of capital will be stable and another 27% who think it will decrease. In contrast, two-thirds of respondents were anticipating an increase in their cost of capital in the Q4 survey.

• Views on the availability of capital have seen a similar shift. More than half (54%) believe the availability of capital will remain the same or increase (28%) compared to 18% who think capital will be less available.

• After a subdued year of investment sales, the number of respondents who expect an increase in transaction/investment activity jumped to 61%, which is roughly double the number of people who held that view in Q4.

Challenging operating environment

The survey results also reflect concerns about the current operating environment. A strong majority continue to expect a challenging operating environment over the next 12 months. However, there is some slight improvement in sentiment with those who predict a challenging environment declining from 92% to 86%.

In addition, views on the magnitude of challenges have moderated. The percentage of respondents who think the operating environment will be extremely challenging dropped by nearly half from 28% who held that view in Q4 to 13% in Q1, with a clear shift in views that pushed expectations for a somewhat challenging operating higher from 64% to 73%. Specifically, survey respondents anticipate more downward pressure over the next 12 months on NOI growth and revenue growth and upward pressure on capital expenditures.

Why Q2 optimism could moderate

A key question is whether the optimism showing up in the survey will be short-lived, or if it can hold up for a longer period. The timing likely played a large role in the more positive Q1 sentiment, with survey data collected between January 23 and February 9, when there was still a stronger consensus that Fed rate cuts in March were still on the table. In addition, the survey closed prior to news breaking that New York Community Bank was struggling under a load of CRE loan losses, which sparked concerns about further tightening of bank liquidity.

One factor that could contribute to a pullback in optimism in Q2 is simply that the speed at which sentiment shifts is much faster than the speed at which the industry moves. Some positive shifts in the survey when compared to the fourth quarter were expected, noting other large positive swings in consumer sentiment. However, for CRE, timelines on projects, business plans, transactions, and underlying portfolio metrics do not adjust quickly.

Some of the QoQ shifts in survey sentiment were quite large, by as much as 20 basis points. Therefore, a mellowing out, with the generally positive sentiment that carries over into the second quarter, would not be unexpected. But Q2 results may confirm if this CRE-specific optimism persists or snaps back.