Article

A look into the current commercial real estate climate

Sept. 29, 2023 · Authored by Mike Kamienski, Brent W. Maier

This Q&A was published as part of PitchBook's H1 2023 Global Real Estate Report sponsored by Baker Tilly.

In this pivotal time of uncertainty in the commercial real estate market, our real estate professionals analyze the current state of the market and offer insight on strategies moving forward.

There's been much discussion of many macro factors for both commercial and residential real estate around return-to-office trends, interest rates and more. What are the factors that you don't see discussed as much that you are watching closely?

It is understandable that those associated with commercial real estate have been keenly focused on interest rates, inflationary pressures, and return-to-office metrics. These issues have been constant since the beginning of 2022. Interest rates have increased 11 times since March 2022, inflation peaked at 9.1% in June 2022, and office occupancies and utilization rates have remained perplexing.

Still, other market factors help paint a more comprehensive picture of the marketplace, both as it stands today and in looking ahead in the near term.

The amount of dry powder—capital sitting on the sidelines and not yet deployed—is a critical barometer that demonstrates the long-term appetite and demand for investment-grade real estate by institutions, family offices, and private investors. The level of undeployed capital, especially in private equity, is substantial. Yet a myriad of factors, including uncertainty around values, the large gap in the bid-ask spread, and the challenge of securing financing, among others, have throttled transaction activity. Investors will return when either values are low enough or when they can underwrite with more certainty.

Because these factors are all interrelated, transaction volumes, another key barometer, are down considerably. The decline is even more dramatic when considering that recent activity levels have been unprecedented, particularly in the industrial and multifamily sectors.

However, real estate investors are transaction-oriented and want to complete acquisitions, dispositions, and development deals. But patience is needed to identify those that make sense and provide the appropriate level of returns for the risk involved.

What concerns are your clients primarily bringing to you?

Our clients, and the industry, are working to weather this period of inactivity and uncertainty. Some are focused on fortifying balance sheets, enhancing operations, and improving net operating income to meet current obligations and position themselves for future opportunities. Other clients seek additional sources of capital—be it fund sponsors seeking investors, or developers/owners aiming to supplement or round-out a capital stack that has changed because of lower valuations, shifting allocations, and the retreat of many banks to the sidelines, among other factors.