The State of Commercial Real Estate
The state of commercial real estate is a topic of much debate and speculation. However, recent data from CoStar provides some insight into the current situation.
According to CoStar, commercial real-estate values experienced an 11.3% decline in August compared to the peak levels seen in July 2020. Certain sectors even saw a decline of up to 20%. These figures indicate a significant downturn in the market.
One of the contributing factors to these declines is the rise in interest rates, which has posed a threat to borrowers and has led to a decrease in transaction volume. However, much attention has been given to the situation in California, where office buildings have been sold at substantial losses and high-profile borrowers have had to surrender their properties to lenders.
Analysts from Barclays, led by Lea Overby, have cautioned that the current valuations may be based on a limited data set. This year's transaction volume, based on CoStar data, stands at only $60 billion so far, making it likely to be the lowest volume year since 2013. Despite this, Overby's team believes that negative news may be creating a bleaker picture of the commercial real estate market than is warranted.
At the beginning of the year, Overby's team predicted that office property prices would drop by 30% in this cycle, while multifamily properties would experience a 20% decrease and retail properties would see a decline of 10%.
It's worth noting that broad decreases in property prices typically take time to manifest fully. This is because many commercial landlords have long-term leases in place with tenants, which provides some stability during times of crisis.
Overall, the state of commercial real estate remains uncertain. While the current data suggests a decline in values, there are still many factors at play that could influence future trends. As the market continues to evolve, it will be important to monitor transaction volume and explore new data sources to gain a more accurate understanding of the situation.
The Future of Debt and the Impact on Real Estate Investments
This year marks the beginning of what could potentially be a far more challenging future, as an enormous $2.7 trillion wave of debt is set to mature by 2027. To compound this issue, the Federal Reserve is predicting higher interest rates for an extended period.
According to Overby's team, the recent abrupt surge in the 10-year Treasury rate to above 4.5% is expected to have further repercussions on transaction volumes in September. They explain that this increase likely led to higher mortgage rates, resulting in diminished returns and causing property investors to reevaluate their pending transactions. If the 10-year Treasury rate remains at current levels, it is anticipated that there will be a continued decline in prices across commercial real estate properties, surpassing initial projections.
Yesterday, the stock market experienced a downward trend. The Dow Jones Industrial Average dropped 0.3%, the S&P 500 index decreased by 0.3%, and the 10-year Treasury yield surged by 10 basis points, reaching 4.66%.
The impact of higher interest rates is not limited to stocks. Popular exchange-traded bond funds like the iShares 20+ Year Treasury Bond ETF (TLT) and iShares Core U.S. Aggregate Bond ETF (AGG) are also feeling the effects. In fact, both funds are on track for their lowest closes since 2007 and 2008.
Read: Renewed bond-market selloff puts popular ETF on track for lowest close since 2007
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