"Here comes the sun" (kind of)
Good news: transactions will pick up in late 2024/2025.
Bad news: many sellers won't like pricing.
Good news: some buyers will like pricing.
Bad news: most would-be buyers will have sat on their hands.
Good news: no one will backtest headlines.
==========
Bloomberg just reported: "The Commercial-Property Market Is Coming Back to Life" (9/24)
A pickup in sales activity is a prerequisite for recovery, so this is great news!
...but before switching to "risk on," let's revisit some narratives from the last few years.
---- Recent headlines ----
"Global Property Market Faces $175 Billion Debt Spiral" (Bloomberg, Jan 2023)
"Mitsubishi UFJ Expected to Sell SF Building at 80% Discount" (TRD, April 2023)
"Huge Midtown office building sells for a 97% discount" (NY Post, Aug 2024)
Theme: the real estate market is unraveling and there may be no end to value declines.
Do reporters intend to lead you to perilous conclusions? No. Their job is to pull together anecdotes under thematic headlines.
...but the absence of framework-based thinking leads readers to focus on "worst case."
Why does this matter? If you're focused only on downside scenarios, you will misprice opportunities.
---- Framework example ----
In mid-2023, we posted:
Every time there’s a meaningful change in market conditions, transactions halt. Why? Because sellers are inclined to see value from a “glass half full” perspective and buyers with cash when cash is king are inclined to see value from a “glass half empty” perspective. The gulf between these perspectives kills transaction activity and throws a blanket over property values.
In the same post, we estimated peak-to-trough value declines based on our estimates of accretive REIT yields:
On balance, cap rates have been hovering around 6%, which generally isn't an accretive level for REITs to buy. But if they fell another 11% to 6.8%, REITs would likely be buyers. This 11% bid-ask gap varies substantially by sector. Assuming REITs set a pricing floor, here’s how far values would fall from recent peaks…
Office -55%
Residential -36%
Retail -31%
Industrial -20%
---- Takeaways ----
Our worst-case estimates proved to be overly bearish, but they set a confident floor that allowed us to evaluate other scenarios.
E.g., widespread bank failures? Didn't see it. A repeat of the GFC or S&L Crisis? Almost impossible. ...all because of this simple framework revolving around what well-capitalized buyers could reasonably pay.
Our updated views and frameworks suggest the bid-ask gap has closed meaningfully (even for office), which will almost certainly lead to a near-term pickup in transaction activity.
We consistently find Green Street's information to be actionable and insightful (no paid endorsements here.) This is a good example. We used Green Street's CPPI as a proxy for what buyers will pay vs. where REITs could accretively buy properties.
Read the full report here.
COMMENTS