CRE Investment Falls To Decade Low, But That Could Soon Change

Investment in commercial real estate has been down in 2024, but with more certainty from the election results and falling interest rates, activity is expected to come back in a big way.

In the third quarter, investment in nondistressed assets totaled $40.1B across 9,467 properties, down from $44.4B across 10,523 properties in Q3 2023, according to a report released last week by Altus Group. The number of transactions through the first nine months of this year was at the lowest level since 2011. 

But signs are pointing toward a market shift after the third quarter. In late September, the Federal Reserve cut interest rates by 50 basis points, and in November it enacted another 25-bps cut. November's election of Donald Trump and a Republican Congress has also created more clarity around federal economic policy. 

With this increased clarity, brokers and researchers are voicing optimism about a pickup in investment sales activity in the final weeks of the year and into 2025. 

"I'm looking towards the end of 2024," Altus Group Associate Director of Research Cole Perry told Bisnow. "I think that now that the election is settled — and that's across the House, Senate and the presidency — that has contributed to some clarity on what's going to happen in 2025. I just think it'll be interesting."

Higher interest rates over the last two years have pushed transaction volume well below typical prepandemic levels. While Perry said it could take awhile to return to those levels, it appears deal flow is poised for a rebound. 

"Transaction activity is still declining a bit, but it is at a decreasing rate, and so I think that that's important as people are looking to find the turnaround or the bottom," Perry said. "The fact that it's declining at a decreasing rate, I think, is a good sign."

Perry said he expects a boost in the fourth quarter, driven by investors trying to get deals closed before the end of the year. Brokerage leaders say they expect the momentum to continue beyond Q4.

"We are seeing signs of positive momentum, with stronger sentiment growing as asset values stabilize," Colliers Head of Global Capital Markets Luke Dawson said in a release last week. 

Colliers' 2025 Global Investor Outlook report says there is "renewed investor optimism" in commercial property markets, in part due to the gap in buyer and seller expectations becoming narrower. 

There is also a wider array of opportunities catching the attention of investors, including data centers, distressed assets like office buildings, and shopping malls. 

"Stronger fundraising, including a return of core capital, will take time to flow through into deal volumes, though it is a strong indicator that more activity will hit the market soon," Dawson said. "In conversations with investors around the world, now is the time to be laying the groundwork for the next few years of growth as the transactional market moves off the bottom of the cycle."

The Colliers survey also says short-term inflation, regulatory pressures, little new supply and the slowdown in construction are factors that are still up in the air and causing uncertainty for many investors.

Major brokerages indicated on quarterly earnings calls in recent weeks that momentum is growing in the commercial real estate investment market. 

CBRE posted 22% annual growth in investment sales revenue last quarter and expects the growth to continue. Net revenue generated from capital markets activity stood at $585M in Q3, up from $477M in the same period last year.

"It’s not going to be a steep capital markets recovery," CBRE CEO Bob Sulentic said on the company's Q3 earnings call. "Buyers and sellers have largely come together for most asset classes or are very close to having come together, but not yet for office. There is debt available now. There is some positive leverage available now."

The firm is also projecting major increases in its operating profits from the return of this deal flow.

"We're expecting our investment sales revenue to grow in Q4 by 30%," Chief Financial Officer Emma Giamartino said. "That's not a low number."

JLL reported a 40% increase in investment sales revenue globally last quarter.

When asked on JLL's Q3 earnings call how he would characterize the outlook of commercial real estate's recovery, CEO Christian Ulbrich said, "It's certainly better than modest, but I wouldn't say it's very strong. But the outlook is positive for 2025."

Matthew Lawton, executive managing director of JLL Capital Markets, said he saw transaction pipelines grow last quarter due to falling interest rates.

"We are also seeing the bid-ask spread between sellers and buyers compress, leading to higher transaction volumes as well as higher anticipated launches to market in early 2025," Lawton said in a statement to Bisnow.

Ulbrich also said the industry could see stronger support from international investors, who are now more likely to invest in the U.S. than any other market.

"We see this significant demand coming from those types of investors into the U.S. market, and that will be a strong support into 2025," Ulbrich said.