Crexi National CRE Trends Report Q2 2024

What Happened in Q2 2024?

Fed signals and economic signs indicated a turning point

Federal Reserve Chair Jerome Powell has indicated that economic risks are becoming more balanced, which could lead to a broader focus beyond inflation control. The Fed is anticipated to cut interest rates by 25 basis points in September, with economists in late July predicting an ~80% likelihood of this happening.

This expectation is supported by recent Fed meeting minutes and Powell’s mid-year testimony, which highlight modest progress in inflation reduction. Consumer prices fell by 0.1% in June, bringing the annual inflation rate down to approximately 3%, a far cry from its June 2022 peak of 9.1%.

The U.S. economy also added 206,000 jobs in June, slightly down from May’s revised figure of 215,000 jobs. In tandem, the unemployment rate has increased marginally to 4.1%, the highest since November 2021. Despite these indicators, the economy has avoided a recession so far, and tenants are managing their rent and lease obligations, aided by the stable job market and slowing inflation. 

The anticipated Fed rate cut could boost investor confidence in the commercial real estate sector. A lower interest rate environment would ease refinancing pressures and likely lower borrowing costs, though the direct financial impact may be modest, particularly with only a 25bps reduction. The psychological effect, however, could spur investment activity in real estate investment trusts (REITs) and regional banks holding CRE loans, mitigating fears of a significant sector crash.

Fewer - but healthier - transactions moved forward. 

Despite a slowdown in the volume of transactions, with offers down ~23% quarterly, the commercial real estate market is seeing gains in high-value deals with solid fundamentals. 

Unlike the free-for-all spending environment characterized by near-zero interest rates in 2020-2021, current transactions are more deliberate and financially pencil out well. These deals are taking longer to complete due to their complexity, often involving multiple lenders, developers, investors, and knowledgeable attorneys. The higher equity requirements and intricate financing structures involved in these deals, which are necessary due to increased borrowing costs, are worth it for the right investments.

A significant amount of “dry powder” or unallocated investment capital is ready to be deployed in the CRE market. Approximately 64% of the $400 billion set aside for property investment is targeted at North America, the highest share in two decades. This readiness to invest and increasing pressure to deploy capital indicates strong investor confidence in the sector’s resilience and potential for recovery.

Contrary to those who keep predicting an oncoming crash, the CRE market has shown remarkable resilience, with lower loan-to-value ratios compared to the pre-Global Financial Crisis period and minimal delinquencies. Investors are more strategic, preferring to raise equity or sell properties at a loss rather than defaulting on loans and lenders thus far have been accommodating to work out plans which also benefit their position. 

However some deals gone bad did trickle through the system and Crexi’s platform observed a 25.8% increase in distressed property sales in Q2 2024 compared to the previous quarter and up 29.7% annually. While these assets might have needed to be sold urgently, many are still finding buyers are acquire them.

Banks are also more likely to be flexible with existing borrowers, providing extensions or adjustments, pricing in exposure to losses into their portfolios, and are willing to sell off nonperforming assets at a discount. Trepp estimates that roughly $1.7 trillion, or nearly 30% of outstanding debt, is expected to mature from 2024 to 2026. Commonly referred to as the “maturity wall,” CRE debt relies heavily on refinancing; therefore, most of this debt will need to be repriced or sold during the next few years, with many owners likely selling at a discount and many promising opportunities emerging for liquidity-flush buyers.

Performance is, as always, sector-specific. Office continues to face headwinds and multifamily, industrial, and retail holding steady-as-they-go. With optimistic eyes toward future rate cuts, the commercial real estate sector is navigating a period of fewer but higher-quality transactions. The significant amount of dry powder ready to be deployed, coupled with strategic investment approaches and anticipated Fed rate cuts, indicates that the market cycle has reached a low point and is starting down a path toward recovery.

"The gloom-and-doom headlines surrounding CRE have been somewhat misleading. Cycles shift and certain strategies, product types, and markets suffer as a result. However, commercial real estate’s resilience has also been on display during the last two years. I believe we’re approaching the cusp of a new cycle and buyers and sellers are nearing a meeting of the minds on value as the bidask gap slowly narrows.” - Eli Randel, COO, Crexi

Election years give pause, but the sector is long-term bullish.

During election years, investors often pause transactions to evaluate potential changes in tax and investment policies. This trend is evident as the U.S. faces upcoming presidential elections and ongoing congressional gridlock, which could impact consumer confidence and maintain high interest rates. 

Additionally, with a record number of over 70 countries holding elections in 2024, geopolitical uncertainty is expected to remain high throughout the year. However, the CRE sector is a long-term investment arena, with deals often extending beyond a typical presidential term. Therefore, while elections are significant, their impact on ongoing commercial property investments is somewhat mitigated.

Apart from the office sector, most CRE segments are performing well operationally, with high occupancy rates and stabilized rents (see below). Delinquencies outside of office in several markets are mainly linked to properties purchased during low-interest periods rather than poor operational fundamentals. Publicly traded REITs are also resilient, relying primarily on long-term unsecured bonds rather than bank financing, making them less vulnerable to short-term financial market fluctuations. As equity investors feel increasingly pressured to deploy capital, investment activity will likely increase as market conditions stabilize.

Despite a temporary slowdown in transaction activities during election periods, the expectation of Federal Reserve rate cuts and increased lending appetite from non-banking sectors support a market recovery. The underlying fundamentals of CRE remain strong, and forecasts indicate a rise in transaction activity, loan originations, and CMBS issuance by 25% to 30% compared to 2023 lows. CRE prices have plateaued and are showing signs of recovery, driven by stable rent and vacancy metrics for most property types, except for office spaces.

Crexi remains optimistic about the CRE sector’s recovery due to the industry’s long-term investment nature and the significant capital poised to enter the market. The strategic, deliberate nature of current deals, which focus on solid fundamentals, indicates a healthier market poised for growth as uncertainties from the elections clear. This combination of factors underscores a bullish outlook for the sector in the coming quarters.

"Since market correction, sparked by rapid rate increases starting in Q1 2022, there has been a healthy market cool-off which has lent to a partial reset. During that time, growing demand for real estate technology has held firm. We believe the start of a new cycle will accelerate demand for marketplace and productivity software which will bring increased speed, liquidity, and efficiency to this great industry.” - Mike DeGiorgio, CEO, Crexi

Commercial Real Estate National Trends

What the Data Says

Industrial Trends

Analysis

• The average annual asking price per square foot for new industrial listings decreased by 4.29% QoQ but increased by 4.1% YoY. This indicates a cooling off following Q1, yet the annual growth in sold pricing suggests the sector remains robust. The moderation in price growth can be attributed to the post-pandemic stabilization in demand for industrial space, particularly as supply has increased significantly with a record number of warehouse completions entering the market.
• The average annual asking rent per square foot for industrial properties rose by 0.79% QoQ and 3.62% YoY. While the rent growth is slower compared to previous years, the upward trend reflects the sector’s ability to absorb new supply. The demand for industrial properties continues to be fueled by the growth of e-commerce, which now accounts for 15.6% of retail sales as of Q1 2024, and the trend of nearshoring manufacturing operations.
• The median asking cap rate for industrial properties slightly increased by six basis points (bps) QoQ and ten bps YoY, while the median sold cap rate remained steady at 7.5% QoQ but increased by 50 bps YoY. This stability in cap rates indicates a balanced market where sellers are confident in pricing and buyers are aligning their return expectations with market conditions. Notably, industrial properties, particularly those in logistics and cold storage, continue to perform well despite signs of moderation, reinforcing the sector’s long-term positive outlook.

Office Trends

Analysis

• The average annual asking price per square foot for new office listings increased by 5.36% QoQ and 8.85% YoY, indicating a recovery in listing prices despite ongoing market challenges driven by premium Class A assets. Similarly, the median closed price per square foot surged by 10.42% QoQ and 14.39% YoY. This growth suggests that while the office sector faces significant hurdles, transactions are still occurring at higher values, reflecting investor confidence in select, high-quality assets.
• The average annual asking rent per square foot for office listings showed a slight decrease of 0.25% YoY, though it increased by 3.83% QoQ. Despite the high vacancy rates, this stability in rents indicates a complex market where prime locations and high-class office spaces are still in demand. Landlords must prioritize tenant needs and adapt to shifting behaviors, including the continued preference for hybrid work models and flexible office spaces, to lease their properties successfully.
• The median asking cap rate for new office listings rose by 25 basis points (bps) QoQ and 36 bps YoY, while the median sold cap rate remained unchanged QoQ but increased by 20 bps YoY. These cap rate dynamics reflect the market’s response to the ongoing challenges in the office sector, including high vacancy rates led by shifts to hybrid and remote work and declining net operating income (NOI). Despite these issues, the increase in cap rates suggests that investors are adjusting their return expectations to align with the current market risks and analyzing opportunities on a deal-by-deal basis.

Retail Trends

Analysis

• Retail hit its highest asking price on Crexi in Q2 2024, up 1.78% quarter-over-quarter and an impressive 11.81% year-over-year (YoY). Furthermore, the median closed price per square foot surged by 14.28% QoQ and 22.58% YoY. This substantial increase in asking and closing prices signifies a healthy demand and confidence in the market, reflecting the sector’s resilience and attractiveness to investors.
• The median asking cap rate for new listings saw a slight decrease of 7 basis points (bps) QoQ but a significant increase of 18 bps YoY. Meanwhile, the median sold cap rate rose by 20 bps QoQ and 50 bps YoY. These changes in cap rates carry important implications for market returns. The decrease in asking cap rates signals sellers’ confidence in achieving better pricing, while the increase in sold cap rates reflects the reality of higher return expectations from buyers in the evolving economic landscape.
• The average annual asking rent per square foot for new listings showed marginal growth, increasing by 0.20% QoQ and 0.95% YoY. This steady rise in rental rates indicates a stable leasing environment, with rents holding firm and even slightly increasing despite broader economic uncertainties. Such stability supports long-term investors who prioritize consistent income streams from their properties, which retail continues to prove.

Multifamily Trends

Analysis

• The average annual asking price per square foot for new multifamily listings saw a slight increase of 0.12% QoQ but a decline of 2.43% YoY, indicating a market stabilization following previous highs. This reflects a balance in the multifamily sector, where demand remains steady, but pricing is adjusting to new supply hitting the market in recent months. The median closed price per square foot increased by 2.34% QoQ. However, it showed a 6.91% decline YoY, suggesting that while the market is stabilizing, adjustments are still occurring based on current economic conditions, with concerns about a lack of available low-income housing making it harder to attract tenants amid rising living costs.
• The median asking cap rate for new listings decreased by six basis points (bps) QoQ and YoY, while the median sold cap rate increased by ten bps QoQ but decreased by ten bps YoY. This indicates that investors are cautiously optimistic, adjusting their return expectations in light of ongoing market dynamics. The slight increase in sold cap rates suggests a realistic approach by investors to account for the economic conditions impacting the multifamily sector.
• Despite slight pricing adjustments, the sector remains stable with robust search popularity and increasing buy actions. This stability is further supported by the consistent need for affordable and workforce housing, which underlines the sector’s resilience. As reflected in cap rate trends, investors are cautiously optimistic, further reinforcing the positive outlook for the multifamily sector.

Final Thoughts

Despite the varied challenges faced by different sectors within commercial real estate (CRE), Crexi remains long-term bullish on the market’s prospects, with plenty of opportunities to be found for those keeping a pulse on key indicators. The anticipation of Federal Reserve rate cuts and substantial investment capital ready to be deployed further supports a positive outlook. 

The CRE landscape is nearly as vast and diverse as the economy itself, and plentiful capital waits on the sidelines for the choicest investment cuts as the overall market finally turns a corner.

Metrics and Methodology

This article relies on data from Crexi’s marketplace. In particular, to ascertain timely and representative trends in seller sentiment, this article focuses on offering metrics, such as average asking price per square foot, cap rate, and monthly rents, in addition to listed occupancy, tenancy, and square footage. Using these listing-based metrics and changes therein, we can use seller expectations at the time of listing to approximate overall valuation trends.

While these data aggregations may broadly reflect prevailing market conditions, it is essential to note that variations can also be affected by inventory changes, asset size, etc. We pair these data points with internal data from Crexi buyers on search trends and acquisition-related actions performed on Crexi to provide a holistic understanding of where both sides of commercial real estate are headed.

Disclaimer

The information in this report is based on Crexi's internal marketplace data and additional external sources that we consider reliable, but we do not represent it as accurate or complete. 

Crexi internal marketplace data consists of aggregated property-level data points provided by brokers and reviewed internally by Crexi. While these data aggregations may largely reflect prevailing market conditions, variations can also be affected by inventory changes, asset size and other factors. 

Nothing contained on this report or website is intended to be construed as investing advice. Any reference to an investment's past or potential performance should not be construed as a recommendation or guarantee towards a specific outcome. The information, opinions, estimates and forecasts contained in this report are as of the date of the article and are subject to change without prior notification.

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