Capital Markets Report

2Q 2024
Newmark Research presents the Second Quarter 2024 Capital Markets Report.

Economy. Despite the weak July labor market report, the U.S. economy on balance continues to prove resilient to higher interest rates. GDP in the second quarter of 2024 surprised to the upside, while real consumer spending growth has held steady and credit card delinquencies continue to rise. Unemployment remains low, but has been increasing at an accelerating rate, creating concern the Fed is behind the curve. The U.S. economy has made some headway on inflation and core PCE is now below the Fed’s June meeting projection for 2024. Rate market expectations have been volatile, seeming to live from CPI print to CPI print, though going forward, the Fed and markets will likely be more sensitive to labor market data. The market recently has been pricing anywhere from 50 to 125 basis points of cuts in 2024, but 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 remained constrained in 1H24, though it showed signs of a potential bottom. Overall, origination volume was down just 4.5% year-over-year in 1H24. The number of active lenders continued to decline, now down 33% from peak. Industrial originations rose strongly in 1H24 offsetting declines in other sectors. Refinancings via securitized lending drove the year-over-year increase in industrial originations. Overall, securitized, insurance and debt fund lending all rose as well, mostly 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. 45% of this maturing debt was originated while the fed funds rate was less than 25 basis points, vs. 533 basis points in 2Q24. 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 $632 billion in debt maturing between 2024 and 2026 is potentially troubled.
Equity Markets. Investment sales declined 10% year-over-year in 1H24 and negative 32% compared with the 2017-to-2019 average. Office sales took a step back after a strong first quarter, while multifamily more than made up for the decline in the commercial space. Liquidity has been strongest for smaller transactions. Deals under $100M made up 65% of volume traded in the last four quarters. Institutional investment rebounded strongly in the 2nd quarter on the back of three large multifamily portfolio deals, mainly the acquisition of the multifamily REIT AIR.
Supply of Capital. Dry powder at closed-end funds currently sits at $253 billion, down 10.3% 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. Indeed, fundraising weakened from $140B in 2022 to $96B in the last 12 months. ODCE fund flows decelerated in 2Q24 after several quarters of improvement. 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 2Q24 to negative 1.0% annualized overall. All sectors recorded positive total returns except for office. 76% of markets recorded positive total returns in 2Q24 up from 32% in 2Q23.