Capital Markets Report

1Q 2024
Newmark Research presents the First Quarter 2024 Capital Markets Report.

Economy. The U.S. economy continues to prove surprisingly resilient to rising rates, though there are signs of a slowdown as a range of hard and soft data indicators have underperformed expectations, including retail sales and consumer confidence. Unemployment remains low, but job openings and quit rates have been declining for some time now. The biggest remains inflation, which has re-accelerated in recent months proving that the last mile back to target remains an uneven one. Rate market expectations has been volatile seeming to live from CPI print to print. The market is now back to pricing two rate cut sin 2024, but the more important message is that the market has been consistently pointing to an equilibrium interest rate of 3.0% or greater, which would anchor long-term interest rates in the mid-3% range even after the Fed has normalized its policy stance.
Debt Markets. CRE debt origination activity remained constrained in 1Q24, though it showed signs of a potential bottom. Overall, origination volume was down just -2% year-over-year in 1Q24. The number of active lenders continued to decline – now down 36% from peak. Industrial originations rose strongly in 1Q24 offsetting declines in other sectors. Securitized, insurance and debt fund lending all rose as well while banks 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. This debt that will mature with significantly higher debt costs than when the loans were originated. 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 $679 billion in debt maturing between 2024 and 2026 is potentially troubled.
Equity Markets. Investment sales declined 22% year-over-year in 1Q24 and negative 35% compared with the 2017-to-2019 average. Office sales actually rose 25% year-over-year in 1Q24 while all others fell. Liquidity has been strongest for smaller deals. Deals under $100M made up 66% of volume traded in the last four quarters. Institutional investment remains anemic – down 55% year-over-year in 1Q24.
Supply of Capital. Dry powder at closed-end funds currently sits at $257 billion, down 9% since December 2022. The capital remains concentrated in opportunistic and value-add vehicles, while debt strategies have pulled back. We estimate that 75% of this capital is targeting residential and industrial assets. Much of this dry powder was raised from prior vintages. Indeed, fundraising weakened from $140B in 2022 to $105B in 2023. Contributions to ODCE funds continued to recover from post-GFC lows in 1Q24, though many funds continue to face redemption queues.
Pricing and Returns. Transaction markets now show clear increases in transaction cap rates, belatedly following the public markets. Lower corporate bond yields have improved 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 1Q24 to -3.9% annualized overall. Hotel, retail and industrial recorded positive total returns. 56% of markets recorded positive total returns in 1Q24 up from just 19% in 4Q23.