Dive Brief:

• The Federal Reserve decision to trim the main interest rate by a half percentage point last week will help support “more than a moderate improvement” in commercial real estate investments but won’t eliminate office sector distress, Richard Barkham, global chief economist and head of America’s research at the real estate services firm CBRE, said last week in a virtual briefing with reporters.  
• “Even though we’ve had these cuts, we’re not going back to that era of 1% interest rates…I don’t think the fall in the cost of debt is sufficient to release a huge wave of that dry powder capital,” Barkham said. “I don’t think we’re going to see an explosion, I think we’ll see a very meaningful uptick in investment activity next year.” 
• CBRE is predicting that annual real estate investment activity will rise 5% this year and Barkham expects it to rise again next year to a range of between 15% and 20% compared to this year, as additional rate cuts combine with reduced anxiety about the risk of a resurgence in price pressures, he said. 

Dive Insight:

The struggling commercial real estate market has been closely watched by CFOs who have navigated the volatility while seeking to both trim overhead costs and adjust to worker demands for hybrid work options. Real estate is a big cost center for companies, with office space often the second or third largest expense for service companies after labor, CFO Dive previously reported. 

Looking ahead, CBRE expects the economy will avert a recession and that its “soft landing” will boost tenants’ confidence and support demand for space across property types. The firm also expects the Fed will reduce the federal funds rate by an additional quarter percentage point in both November and December, followed by a total of 1.25 percentage points in cuts next year. The 10-year Treasury yield will likely remain below 4% at the end of 2024 and hover in the mid-3% range for most of next year. 

During the briefing Darin Mellott, vice president and head of U.S. capital markets research for CBRE, said that lower interest rates will bring less distress, especially as the rate on the 10-year Treasury gets closer to the 3.5% range. However, he warned that some distress will persist, particularly in the office sector. 

In addition, even with the cuts some banks with exposure to distressed real estate debt will still be under pressure, as it will be a long time before the values of properties get close to where they were in 2021-2022 before the downturn. 

“The banks that have lent to real estate, particularly in the office sector, particularly grade b and c, will see there’s still a long way to run through this crisis,” Barkham said, noting that there is an still an expectation that certain banks will still fail even with the rate cut. Still, the fact that the economy is not a recession will lead to far fewer bank failures than had been previously anticipated from banks booking losses due to the drop in property values.