Capital Markets Report

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3Q 2024
Newmark Research presents the Third Quarter 2024 Capital Markets Report.

4 Q19 US Capital Markets Report social v1

Economy. Strong economic data was the hallmark of the third quarter of 2024, despite the continuing effects of 2-decade high interest rates. GDP growth in the third quarter of 2024 came in at a strong but slightly below expectations 2.8%, with solid growth from both consumers and business investment. Unemployment remains low, and finished the quarter at 4.1%, the same as June. The U.S. economy has made some headway on inflation, however YoY core PCE has remained stubbornly 60 basis points above the Feds long term target since May. Rate market expectations have been volatile, seeming to live from economic data print to economic data print. The market recently has been pricing 50 basis points of cuts in 2024, with another 100 to 15 basis points of cuts in 2025, though the election results are moving these expectations significantly. The more important message is that the market has been consistently pointing to an equilibrium federal funds rate of 3.0% or greater, which would anchor long-term Treasury yields in the mid-3% range even after the Fed has normalized its policy stance.
Debt Markets. CRE debt origination activity began to show signs of growth in the third quarter, though volumes remain well below pre-pandemic averages. Overall, origination volume was up 7.1% in the first 3 quarters of 2024. The number of active lenders continued to decline, now down 30% from peak. Industrial, Multifamily, and Hotel originations rose in 2024 offsetting declines in other sectors. Overall, securitized, insurance and debt fund lending all rose as well, more than offsetting a decline in originations from banks whose lending fell sharply. Regional banks face a protracted deleveraging from CRE. All this is occurring while the market is set to absorb $2.0 trillion in debt maturities in the 2024-to-2026 period. 46% of this maturing debt was originated while the fed funds rate was less than 25 basis points, vs. 513 basis points at the end of 3Q24. Additionally, many loans are underwater or nearly so, especially recent loan vintages of most property sectors and broad swaths of office debt. We estimate that $529 billion in debt maturing between 2024 and 2026 is potentially troubled.
Equity Markets. Investment sales declined 4.7% year-over-year in the first 3 quarters of 2024 and negative 33% compared with the 2017-to-2019 average. Office sales were flat compared to the second quarter, while multifamily took a step back after an M&A heavy second quarter. Liquidity has been strongest for smaller transactions. Deals under $100M made up 67% of volume traded in the last four quarters. Institutional investment continues to outpace 2023, with a 38% increase in Office acquisitions, though institutional remains net sellers of Office.
Supply of Capital. Dry powder at closed-end funds currently sits at $326 billion, down 11.7% since December 2022. Dry powder at value-added, opportunistic and debt funds are now well-off their peak levels. We estimate that 78% of this capital is targeting residential and industrial assets. Much of this dry powder was raised from prior vintages. ODCE fund flows decelerated showed net outflows for an 8^th straight quarter. Redemption queues remain an issue for many funds, driven by persistent if narrowing gaps between NAV and market values.
Pricing and Returns. Transaction markets now show clear increases in transaction cap rates, following the public markets. Lower corporate bond yields have driven improvement in mortgage bond spreads. Nonetheless, both in the private and public markets, cap rates appear distinctly unattractive relative to the cost of debt capital, possibly excepting office REITs. This is not surprising in the private markets, where transaction volumes are muted and reflect selection bias and appraisal-based valuations lag market conditions. Extremely narrow cap rate spreads in the REIT markets are harder to justify and seem to require a rapid decline in debt costs, historically abnormal NOI growth or a combination of the two. Notwithstanding the structural deficiencies in NCREIF valuations during periods of rapid change like today, NCREIF NPI broadly improved in 3Q24 and was positive for first time since 3Q23. All sectors recorded positive total returns except for office. 77% of markets recorded positive total returns in 3Q24 up from 41% in 3Q23.