US CRE sentiment improved in Q4: Better capital access, fairer asset pricing

US Q4 sentiment survey shows improving sentiment around asset pricing, access to capital

The latest installment of Altus Group’s Q4 US Commercial Real Estate Industry Conditions and Sentiment Survey (ICSS) shows a continued trendline of improving sentiment, with especially encouraging signs around improving access to capital and views that assets are more fairly priced than in past surveys.

Questions in the survey explore both current conditions and future expectations, and the context for the current survey findings also is noteworthy. Research was conducted between October 9 and November 5, 2024, meaning that the survey captured market sentiment following the key move by the US Federal Reserve in September to lower the federal funds rate by 50 points. However, it does not account for the outcome of the November 5th presidential election and the decisive win for President-elect Trump.

At the time the survey was fielded, clarity on who would be in the White House and how power would ultimately shift in Congress was still very much up in the air. "Investors don’t like uncertainty and often associate 'unknowns' as potential risk. But despite the many unanswered questions that remain heading into 2025, the Q4 survey respondents appear to be focusing more attention on the 'knowns' - a still-strong US economy, an improving capital market, generally healthy fundamentals, and improving pricing and valuations,” says Omar Eltorai, Director of Research at Altus Group. “Survey results reflect an improving and generally positive outlook for CRE. The positive shift in outlook is balanced, and not pollyannish, as survey respondents indicated that some concerns remain. Altogether, if these expectations materialize, 2025 may prove to be a busier and better year, even if not a record-breaking one.”

Stronger appetite to transact

Respondents across the board, from those firms with less than $500 million in assets to those with more than $5 billion in holdings, indicated a strong appetite to do deals in the near term. On average, 90% of respondents said they intend to transact over the next 6 months, which is a significant increase compared to the 79% of respondents in the Q4 2023 survey who said they were planning to buy and/or sell property.

Figure 1 - Transaction intentions over the next 6 months

What is interesting is that middle market respondents, those with assets under management (AUM) between $500 million and $1 billion, anticipate being the most active buyers by a wide margin. 63% said they plan to acquire new assets, followed distantly by 38% of small investors who said they plan to buy new assets. The large investors indicate that they will be the most active overall, with 48% who said they plan to both buy and sell assets over the next six months.

Reset on property prices

A majority of respondents indicated that they believe that current prices on retail, hospitality, industrial, single-family rental, and multifamily are “priced about right.” Retail emerged as a clear leader, with more than three-fourths of respondents (78%) saying that retail is fairly priced. On the opposite end of the spectrum, office was considered to be the most “overpriced” sector with 56% of respondents who believe assets are still too expensive.

Figure 2 - Characterization of current pricing across major property types

Compared to Q4 2023, the characterization of "overpriced" for industrial, office, multifamily and retail has fallen significantly, coming down by nearly 25%, suggesting that current prices are more in line with what participants consider to be appropriate. While the move away from “overpriced” to “fairly priced” is a welcome sign, few respondents see bargains in the market. Those who think assets are “underpriced” remain a distinct minority for all property types.

Figure 3 – Net characterization of current pricing

Greater access to capital

A majority of respondents expect all sources of debt and equity to be at least somewhat available over the next 12 months. On the equity side, respondents view funds (private equity and/or hedge funds) to be the most accessible source. Half of respondents view equity from funds as being “very” or “extremely” accessible, a significant jump compared to 28% who held that view a year ago. Respondents also noted increased expectations for capital availability from REITs, with 87% believing they would be at least somewhat available, which is a big jump compared to 52% in Q4 2023.

Figure 4 – Expectations for the availability of capital over the next 12 months

On the debt side, debt funds and direct lenders are viewed as the most accessible source of capital. More than half of respondents (56%) stated that they expect debt funds to be “very” or “extremely” available in the coming year. The securitization market has seen the most dramatic shift in expectations, with 87% who believe the source will be at least somewhat available over the next 12 months, an increase of 11% from the prior quarter and 51% from the prior year.

Data centers are the new darling

Data centers surged into first place as the most anticipated top-performing property type, with 62% of respondents expecting it to rank among the best performers, a 32% increase from Q3 2024. Multifamily followed closely at 60%, though this marks a 9% decline quarter-over-quarter and a 5% drop year-over-year.

Figure 5 – Property types expected to be the best and worst performing in the next 12 months

Industrial sentiment continued to soften, with Q4 2024 marking the fourth consecutive quarter of declines. The percentage of respondents citing industrial as a potential top performer fell by 5% quarter-over-quarter and 20% year-over-year, settling at 53% in Q4 2024.

The outlook for office remains bleak. Although there was some slight improvement compared to a year ago, a staggering 88% of respondents expect it to be the worst performing sector. Life science properties also took a sharp turn to the negative. Nearly one-third of respondents (31%) expect it to be among the worst-performing property types, up from 12% in the previous quarter.

Costs remain top concerns for investors

Despite easing inflation and the start of Fed rate cuts, costs and access to capital remain top-of-mind for investors. Capital costs, insurance costs, and operating costs rated as the top three concerns. However, it is worth noting that some of the fears related to high costs and access to capital appear to be easing. Although capital costs / interest rates remained the number one concern for 49% of respondents, views have improved significantly from 60% who thought it was a top issue in the previous quarter and 71% a year ago. Concerns about insurance costs also declined to 42%, while worries about capital / credit availability showed marked improvement, dropping from 47% in Q3 to 34% in the Q4 survey.

Figure 6 – Priority issues over the next 12 months

On the opposite side, those issues where respondents indicate increased levels of concern include economic growth, geopolitical risk / international relations, and development costs. Geopolitical risk posted the largest quarterly increase (+15%). Other external risks also grew quarter-over-quarter, including supply chain disruptions (+9%), natural disasters/weather risk (+9%), and economic growth concerns (+8%).

It will be interesting to see how top issues and overall sentiment for commercial real estate may shift in Q1 after President-elect Trump takes office in January. There is likely to be more clarity on policy priorities that could impact the US economic and CRE outlook.

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Our ability to share valuable market insights depends on the active participation of industry professionals like you. As we gather a diverse range of voices, the richness of the data deepens, allowing us to segment responses and paint a more detailed portrait of the industry’s collective outlook each quarter.

Your participation is instrumental in shaping the narrative of the commercial real estate landscape, please support this survey program by sharing your perspective on our next installment of the ICSS.

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