Capital Markets Activity Expected to Stabilize

We expect that commercial real estate investment activity will begin to pick up in the second half of 2024, although an uncertain macro environment and elevated interest rates will continue to weigh on investor and lender sentiment.

We also expect losses in the banking sector due to decreases in real estate values. Even though charge-offs will be spread out over the course of the next several years, some banks will fail and their appetite to lend to commercial real estate will remain muted throughout 2024. It will remain extremely difficult to finance office properties, particularly for non-Class A assets. Select multifamily, industrial and grocery-anchored retail assets can still be financed but asset quality and existing relationships with borrowers will be key considerations for lenders.

Notable amounts of equity capital remained on the sidelines at the end of 2023, particularly for value-add and opportunistic strategies. We expect that some of this capital will be deployed throughout 2024.

Figure 5: North America Dry Powder by Strategy

Source: Preqin, CBRE Research, November 2023.

Further Cap Rate Increases Ahead

Real estate values for most property types are unlikely to fully stabilize until mid-2024. Cap rates, excluding those for office assets, increased by roughly 150 basis points (bps) between early 2022 and late 2023 depending on market and asset type. Office cap rates rose by at least 200 bps. This implies a 20% decline in values for most property types. We think cap rates will expand by another 25 to 50 bps in 2024, with a corresponding 5% to 15% decrease in values.

Figure 6: Historical & Forecast Cap Rates

Source: CBRE Economeric Advisors, Q3 2023.

Conditions Ripe for Opportunistic Investment

Multifamily and industrial assets will be most favored by investors in 2024. Both property types have relatively strong fundamentals (demand, vacancy, rent growth, etc.) and long-term tailwinds that bolster their attractiveness. Retail fundamentals also look strong, although the sector will inevitably suffer from a slowing economy. The higher-for-longer outlook for interest rates will cause some owners of Class B and C office assets to sell due to further erosion in values.

There will be notable opportunities in 2024 for all-cash buyers such as sovereign wealth funds and endowments, as the higher cost of debt capital will reduce competition for prime assets. A large amount of capital has been raised in the private credit market for opportunistic investments, as traditional sources of credit—particularly banks—pull back. We expect that the lowest pricing for assets will be during the first half of the year.

Decline in Investment Activity to Moderate

Total investment volume is expected to decrease by only 5% year-over-year in 2024, stabilizing after a 45% drop in 2023. Lower levels of investment activity are directly tied to expectations that the 10-year Treasury yield will remain elevated throughout the year. This will lead to some distress for Class B and C office buildings and for certain assets that were highly leveraged using floating-rate debt amid ultra-low rates.

However, CBRE Research forecasts an average 10-year Treasury yield of 3.3% from 2025 to 2028, which will support investment activity and asset prices over the medium term.

Figure 7: U.S. Historical & Forecast Investment Volume, 2007 to 2024

Source: CBRE Research, MSCI Real Assets, Q3 2023.

Trends to Watch

  • Cap rates will continue to rise through midyear and stabilize thereafter, marking a trough in asset pricing.
  • Industrial and multifamily assets will likely remain most favored by investors due to relatively strong fundamentals.
  • We expect notable debt funding gaps for some office and multifamily assets.
  • Restricted bank lending will create opportunities for debt funds and other non-bank lenders able to take advantage of high interest rates and more attractive valuations of assets throughout 2024.

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