We can all admit that 2023 was a challenging year for the commercial real estate industry. Inflation and rising interest rates led to a significant bid ask gap, resulting in a 20% to 25% dip in CRE sales compared to the average between 2014 and 2019.
It’s a different story when we look ahead to 2024, especially the second half of the year. Things are trending in a positive direction and by the third and fourth quarters of 2024, they will have a direct impact on investment sales deal flow.
The main driver in this resurgence has been the headline in recent weeks: interest rates are finally coming down and will continue to drop throughout the year. The 10-year treasury rate peaked at 5% last October and since then has steadily decreased with anticipated Federal Reserve rate reductions on the horizon.
Wall Street has given a 60% chance that the Federal Reserve will reduce rates by 25 basis points in March, and a 50% chance that the rate will be down to 4.5% by June. By the end of the year, the Federal funds rate is expected to be 4% or lower. This decline in the cost of debt capital will reduce the bid ask gap and positively impact deal flow.
I spoke in my video last month about the possibility of a soft economic landing, a hard landing, or no landing at all, and all signs now point to a soft landing for the economy in 2024. Inflation is down since it peaked in 2022, job creation is up, and investor sentiment is cautiously optimistic.
That investor sentiment is the last piece of the puzzle to a market recovery. Investors have been waiting on the sidelines with approximately $240 billion dollars of “dry powder”, and if the economic stars align, they’ll be jumping in feet first to purchase investment properties this year.
The pandemic gave us a skewed perspective of commercial real estate activity with record high levels in 2021 and 2022, but I expect the 2024 market to come out of the slump and align with pre-pandemic transactional flow.
Justin Langlois, CCIM is a Commercial Real Estate Advisor with Stirling Investment Properties servicing Baton Rouge, Louisiana and surrounding markets. Please reach out to Justin to discuss your real estate investment strategies.