2Q24 Burns + CRE Daily Fear and Greed Index: The Worst is Over

Commercial real estate investors believe we’re at a cycle bottom and that asset values have either already bottomed out or will before the end of 2024.

Jordan B.
September 25, 2024

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Good morning. Thank you to the 1,000+ subscribers who participated in the 2Q24 Burns + CRE Daily Fear & Greed survey! The data is in, and we’ll be breaking it down in today’s newsletter. You can also click here to download the findings.

Today’s issue is brought to you by Agora—your all-in-one real estate investment management platform.

🎙️ No Cap by CRE Daily: Jonathon Barkl, CEO of AirGarage, shares how he went from college student to disrupting the parking industry, evolving AirGarage into a full-stack, tech-first parking operator.

Market Snapshot

S&P 500

GSPC

5,718.57

Pct Chg:
+0.28%

FTSE NAREIT

FNER

848.98

Pct Chg:
+1.10%

10Y Treasury

TNX

3.753%

Pct Chg:
+0.017

SOFR

1-month

5.34%

Pct Chg:
0.0%

*Data as of 9/24/2024 market close.

FEAR & GREED INDEX

Investors Say the Worst Is Over for Commercial Real Estate

Despite recent challenges in commercial real estate (CRE), the latest 2Q24 Burns + CRE Daily Fear and Greed Index reveals a generally optimistic outlook among the 1000 investors surveyed, with most expecting growth in the near future.

Growing optimism: The Fear and Greed Index—a leading indicator for commercial real estate investment activity—rated 53 on a 100-point scale in 2Q24, indicating a market that is balanced between excessive fear and exuberance. Multifamily, industrial, and retail real estate investors are more open to risk, while office investors are more cautious.

We’ve hit bottom: Commercial real estate investors are increasingly optimistic, with 38% believing asset values have already hit their lowest point and another 18% expecting a bottom by the end of 2024. Across nearly all asset classes, investors anticipate value growth within the next six months—except for the office sector, where most expect the market to reach its low in 2025.

Multifamily mood: For the first time in the survey’s history, multifamily investors anticipate positive price growth in the next six months, driven by strong demand and the potential for even lower interest rates. With a strong labor market supporting absorption, 57% of multifamily investors plan to increase their exposure.

Office challenges: The office sector, heavily impacted by remote work, has seen asset values drop -20% YOY, per our survey. While 43% of office investors expect further declines through 2025, 37% believe office values have already hit their bottom. The disparity in opinions reflects variations in office types (A/B/C, etc.) and locations.

Rising insurance costs: Insurance premiums are spiking across CRE, mirroring trends in residential real estate. About 75% of investors saw premiums jump by 10% or more this year, with 1 in 10 facing increases of 50% or higher. For 4%, premiums more than doubled, likely due to high-risk property locations. As disaster risks are reassessed, factoring in higher insurance costs is critical when evaluating deals.

How have commercial real estate insurance costs changed

➥ THE TAKEAWAY

The worst is over: The Federal Reserve’s aggressive rate hikes in 2022 dried up capital, hitting office and multifamily sectors particularly hard. Offices struggled due to the shift to remote work, while multifamily faced oversupply. However, signs of easing inflation and softening labor markets are fueling expectations for interest rate cuts, which could revitalize CRE activity. Easier access to capital will be a boon to commercial real estate and should help bring the transaction market back to life after 2 years of little activity.

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✍️ Editor’s Picks

Yields unraveled: The 10-year Treasury yield has fluctuated YTD, ranging from 3.65% to 3.75%, indicating economic uncertainty and volatility ahead.
Opportunity: Ascent's preferred equity deal offers investors steady passive returns and secure capital stack positioning in the booming Dallas market with their latest deal. (sponsored)
Behind closed doors: CoStar denies a preliminary injunction in a lawsuit where an ex-Realtor.com staffer allegedly shared info with Homes.com.
Harassing investors: Related CEO Jeff Blau is suing EB-5 investors, claiming they are threatening his family to demand their $500K in investments back.
Green growth: Fort Worth is doubling down on preserving 10K acres of green space, recognizing parks as essential for economic vitality and long-term sustainability.
Steady as she goes: US business activity remained steady in September, but rising prices for goods and services signal potential inflation pressure in coming months.
Global insights: JPMorgan Chase (JPM) offers customized financial services, including investment banking solutions and private banking experiences, serving clients globally.

🏘️ MULTIFAMILY

Migration motivation: 5 mid-sized US metro areas, including Austin and Raleigh, are enjoying positive net migration of young professionals, driven by job opportunities and housing affordability.
Tower transformation: The Georgia-Pacific Tower at 133 Peachtree Street will be transformed into 400 apartments, 125 KSF of entertainment space, and 600 KSF of office space by Fall 2027.
Mobile marvel: The Point Dume Club, a 297-residence mobile home park in Malibu, sold for nearly $200M, with new owners pledging to maintain the community as is.
Student housing shift: Hawkins Way Capital bought a 159-unit student apartment building in Berkeley at $290K per unit and plans to renovate it for affordable housing.
Brooklyn refi boom: Mack Real Estate and STRS Ohio secured $159M to refinance The Greenpoint, a luxury Brooklyn multifamily property with 368 units and 46 KSF of commercial space.

🏭 Industrial

Emptier, for now: Due to oversupply, the industrial real estate market is facing rising vacancies and slowing rent growth, with some stability expected by 2025.
IPO momentum: Switch, a leading data center firm, may soon launch a $40B IPO, signaling a potential shift back to Wall Street’s favorite modern pastime.
Industrial expansion: Stoic Equity expanded in the Southeast by acquiring Woodlane Circle Commerce Park in Tallahassee, offering 48.75 KSF with 19 units.

🏬 RETAIL

Retail reimagined: Migration trends continue to impact retail space per capita, with Sunbelt retail failing to match population growth, while the opposite unfolds in the Midwest.
Gearing up: Sienna Motors purchased a shuttered dealership for $22M, expanding its footprint near its existing sports and classic car site in Pompano Beach.

🏢 OFFICE

Hybrid success: According to a Unispace survey, 90% of office employees and 98% of employers seem satisfied with their current hybrid working arrangement.
Bay Area selloff: Kennedy Wilson sold San Mateo Gateway Center for $37.5M—less than half its pre-pandemic price—reflecting ongoing struggles in the region's office market.

🏨 HOSPITALITY

Revitalizing Broadway: The AC Hotel in San Antonio, with 211 rooms by Fulcrum Development and GrayStreet Partners, is part of a mixed-use development that will replace the historic Pig Stand diner.

📈 CHART OF THE DAY

Default rate for senior loans has nearly tripled since mid-2022

Source: MSCI

Private credit has surged over the past decade, but funds now face scrutiny over loan credit risk. Analysis of MSCI data from over 30K loans shows defaults dropped after the pandemic but have nearly tripled for senior loans since mid-2022 as interest rates rose.

Most private credit loans are floating-rate, so rising rates impact companies' ability to cover interest payments, increasing default risk. Loan discounts might also reflect wider spreads, which can mask the true level of distress.

FACT OF THE DAY

The largest commercial office building in the world is the Pentagon, with over 6.6 million square feet of space. Despite its size, it was constructed in just 16 months during World War II!