If “survive until ’25” has become the mantra for much of the struggling commercial real estate market, many industry leaders nonetheless hope to be looking on the brighter side before the end of 2024.
C-suite executives at CBRE and Cushman & Wakefield updated investors this week on when a recovery might appear and the sectors likely to drive activity.
“Property prices are gradually declining, and we believe this process won’t complete and transaction activity won’t rebound materially until investors are confident that interest rates have peaked and credit becomes readily available,” said Bob Sulentic, chief executive of CBRE, on an analyst call following the company’s third-quarter results. “We now believe this rebound is unlikely to occur until the second half of next year at the earliest.”
Sulentic added: “The biggest thing that has shifted, in our view, is that it’s going to take longer for interest rates to come down. It’s going to take longer for debt, in particular, to become available for commercial real estate transactions. And as a result, transactions are not going to return until the back half of next year, whereas we thought they were going to return late this year or early next year.”
Just as investment deals have dried up, hesitancy in the leasing markets has also been “happening for a while”, said Sulentic. “It has become a little more pronounced, and we think it’s going to go into next year,” he added. “Everybody knows that we don’t have the kind of financial problems we’ve had in prior cycles. But we have a lot of uncertainty, and we have uncertainty around the cost of capital, which causes companies of all types to be careful about their expenditures that would run through their income statement. Of course, the minute that happens, they are cautious about leasing.”
At Cushman, chief executive Michelle MacKay (pictured) sounded a similar note. “This year, we’ve got a couple of large leases this quarter for occupiers, but we’re also seeing them holding off on decision-making,” she said. “Occupiers have taken a defensive posture this year because of the higher cost of capital, and they have been very careful with expenditures, which obviously impacts their decision-making… What we think is happening is that perhaps some of the weakness that would have been in 2024 is actually getting pulled forward this year.”
In the investment market, MacKay said, there remains “a lot of friction” around pricing. “You clearly have movement of cash flow, flight to quality in the assets as well,” she said. “Some 60% to 65% of the deals we actually see getting done are still in industrial and multi-family. Those are the two sectors that buyers, sellers and lenders have the most confidence in.
“There is strong build-up in capital for opportunistic [deals], there’s a lot of dry powder out there, and investors are getting anxious to deploy it. So we don’t think it’s a matter of ‘is [a rebound] going to happen’. It’s going to happen, but we probably have a couple more months before we really start to see volume in terms of clearing in the stress and distressed markets.”
Once the markets start to show signs of recovery, agents are confident that the pick-up will happen at a clip. Indeed, CBRE is already pointing to 2025 as a potential record year for its business.
“There is a reasonable path to getting back to record,” said chief financial officer Emma Giamartino. “We are not anticipating a sharp recovery, especially not next year, and we don’t require a sharp recovery in 2025 to get to that record level.
“Our resilient lines of business – which include Global Workplace Solutions but also include property management, the recurring elements of our investment management fees, valuations and loan servicing – are $1.6bn [£1.3bn] of [segment operating profit]. So that growing at low double digits over the next two years will create meaningful value. And our transactional lines of business – development, the portion of investment management that is more transactional… loan origination and sales origination – those elements only need to get back to just shy of 2019 levels for us to get to record earnings.”
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