The five key insights from the survey on the state and sentiment of the US commercial real estate industry in the third quarter of 2024

Survey results show an improving outlook for easing capital conditions and solid fundamentals

In the latest edition of Altus Group's CRE Industry Conditions and Sentiment Survey (ICSS) for the US, responses indicate that the commercial real estate (CRE) industry is experiencing an improving financing environment, stable operating cash flows, moderate compression in capitalization rates and an increase in transactions expects activity. This article presents additional details from Altus Group's research team on the survey's key findings.

The financing environment is expected to improve next year

In anticipation of the Federal Reserve's recent shift to easing monetary policy through interest rate cuts, third-quarter 2024 survey participants said they expect overall interest rates and the cost of capital for commercial real estate to decline significantly further over the next 12 months.

In general, revenue and NOI growth at the property level are expected to remain stable next year, suggesting that improved financing conditions coupled with a slight reduction in the cap rate could support property valuations.

While survey respondents still expect hardship to increase, they hold this view with less conviction than in previous quarters. An increase in distressed transactions could provide attractive investment opportunities and contribute to the overall increased investment activity expected by participants.

Capital availability across all sources is also expected to improve

Capital availability from both equity and debt sources is expected to improve over the next year as the Fed's recent interest rate cuts are digested and impact providers of capital. Net expectations for capital availability by source rose sharply in the latest survey results.

While the survey results indicated improved availability expectations for almost all sources of capital, bank lenders and mortgage REITs remain outliers as net expectations suggest these lenders will remain constrained. Responses from the last four quarters have shown significant improvements in life insurers' and securitizations' net debt expectations, improving by 52 percentage points and 63 percentage points, respectively, since the fourth quarter of 2023.

The perception of current prices continues to shift towards “fair prices”

Across the largest real estate sectors, participants are increasingly describing current prices as “about fair.” The majority of respondents from seven of the eleven industries chose the characterization “fairly priced”. While single-family homes and land/construction projects were still described as “overpriced” in the third quarter, hospitality and multifamily housing experienced significant swings from “overpriced” to “fairly priced” beginning in the second quarter.

Looking back over the last four quarters, the overall net characterization of pricing (the percentage of respondents who chose “overpriced” minus the percentage of respondents who chose “underpriced”) has declined across major real estate sectors.

Short-term transaction intentions increased across all company sizes

Respondents' short-term transaction intentions continued to increase in the third quarter. A clear majority (89%) of respondents said they plan to transact (purchase and/or sell) in the next 6 months, which is the highest ever recorded. The smallest institutions (less than $500 million) said they plan to become net buyers, while 60% of the largest institutions (more than $5 billion) said they plan to buy and/or sell.

Local issues are high on the list of expected priorities

Participants' responses indicated that capital considerations (cost of capital, capital availability) remained a top priority in the Q3 survey – although this may be at least in part because the survey period preceded the Fed's first rate cut announcement.

Cost of capital remained the top concern for respondents for the fourth consecutive quarter, with 60% of respondents citing it as a priority – the only issue identified by a majority in the third quarter. Capital availability was also a major concern, ranking third at 47% and recording a significant increase (+6%) compared to the previous quarter.

Problems at the property level were also widely acknowledged. Operating costs were a priority for 49% of respondents, up 3% from the second quarter. Tenant retention remained a consistent concern, with 38% of respondents citing it as a priority, a change from the previous quarter. When it comes to real estate concerns, the share of respondents citing “insurance costs” fell 16 percentage points in the third quarter, the most of any issue, while the share of respondents worried about taxes fell nearly 10 percentage points .

Community concerns moved to the forefront, while some real estate concerns, such as taxes and insurance costs, faded into the background. Concerns at the community and regional level increased significantly in the third quarter, with housing issues coming to the fore. Housing costs and availability increased primarily by 7%, employment and income growth also increased by 7%, and zoning reform increased by 6%.

A request for your participation

Our ability to share valuable market insights depends on the active participation of industry experts like you. The more voices we collect, the richer the data becomes, allowing us to segment responses and paint a more detailed picture of the industry's collective outlook each quarter.

Your participation is instrumental in shaping the history of the commercial real estate landscape. Please support this survey program by sharing your perspective on our next edition of ICSS.