- Economy. The U.S. economy continues to prove surprisingly resilient to rising rates. Real gross domestic product grew at a 3.3% annual rate in the fourth quarter of 2023, a strong showing. There are some signs of labor market softening, but overall conditions remain extremely tight, with 1.4 jobs available for every unemployed person. Wage growth has moderated but remains at the highest levels since the late 1990s. Inflation has moved towards the Fed’s target, but in recent months there have been signs of re-acceleration. This, combined with the continued strength of the economy, provides the Federal Reserve with proceed cautiously with rate cuts in 2024. Markets, which overzealously drove 10-year Treasuries to 5.0% in the Fall, recently repeated the error in the other direction, pricing six rate cuts in 2024. Markets are now moving back to a middle, and in our view, more realistic path.
- Debt Markets. CRE debt origination activity remained constrained in 4Q23. Overall, origination volume was down 44% year-over-year in 2023. It’s not just dollar volumes – there are 29% fewer active lenders in 4Q23 compared with the peak. Originations are down sharply across property types and lending sectors, though office, debt funds and CMBS/CRE CLO are negative outliers. The bigger issue is that the small and regional bank lending engine that has driven the CRE market is rapidly slowing with no clear replacement. 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 $670 billion in debt maturing between 2024 and 2026 is potentially troubled.
- Equity Markets. Investment sales declined 53% year-over-year in 2023 and 33% compared with the 2017-to-2019 average. Sales declined year-over-year across property sectors in the fourth quarter of 2023 and year-to-date. Sales declined quarter-over-quarter, except for office. Investment allocations continue to evolve. Multifamily has returned to its pre-pandemic share, while retail and industrial allocations rose in 2023. The office share continued to contract to just 13% of sales. Investment declined across capital groups in 2023 but institutional investors most dramatically – likely due to higher sensitivity to the cost of capital.
- Supply of Capital. Dry powder at closed-end funds currently sits at $259 billion, down 8% since December 2022. The capital remains concentrated in opportunistic and value-add vehicles, while debt strategies have pulled back. 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 $199B in 2022 to $148B in 2023. Contributions to ODCE funds rebounded from post-GFC lows in 4Q23, 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. Recent declines in 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 NCRIEF valuations during periods of rapid change like today, NCREIF NPI total returns were broadly negative in the fourth quarter of 2023. Hotel and retail continued to outperform on the margin. Returns were negative in 81% of metro markets up from 60% in the third quarter of 2023.
- Insights>
- Market Report Page >
- Capital Markets Report
Capital Markets Report
4Q 2023
Newmark Research presents the Fourth Quarter 2023 Capital Markets Report.