Charted territory: Anatomy of a CRE correction

The Investment Research team updates their views on the CRE market heading into 2024. Listen to the key trends from one of our experts. Then, read the chartbook for the full story.

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December 5, 2023 | 10 minute read

The commercial real estate (CRE) market continues to endure a correction that began 18 months ago. Seven months ago, we published the first iteration of this chartbook, laying out our views on the market. In this update we chart the progress of the correction, discuss its drivers and identify areas of opportunity that persist despite the challenged market environment.

The U.S. commercial real estate (CRE) market has been in the clutches of a correction that began in mid-2022. Since that time, property values have broadly declined between -10% and -20%, depending on the sector and index being used, while the level of transaction activity has fallen by around half. This correction has come on the heels of perhaps the best two-year CRE investing environment in modern history, during which values and activity soared thanks to a potent cocktail of rock-bottom interest rates and a rapid post-COVID economic rebound. Interest rates have soared over the past 18 months—turning a tailwind into a massive headwind—but a resilient economy has kept the market from enduring something more painful.

The question, then, is how far the past 18 months have gone toward delivering a new market equilibrium. Declines in property values have slowed markedly in recent months, and transaction activity, while still below healthy levels, has been stable for three straight quarters. In other words, the pace of the correction has been reduced as the “push and pull” between higher rates and solid fundamentals has resulted in something of a stalemate. Ultimately, the direction of rates and the economy will determine how much further the correction has to go. It would not surprise us to see the current environment persist into 2024, which would imply a shallower but more gradual correction, rather than the sharp CRE downturn that many (wrongly) forecasted for 2023.

Read the complete chartbook to learn more.

Listen to the author’s overview.

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Andrew Korz, CFA

Executive Director, Investment Research

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