After several years of high interest rates, limited transaction activity and investors repeatedly saying, “Let’s wait another six months,” the commercial real estate market may finally be beginning to thaw.
According to a recent CNBC report citing JLL’s bidding and credit indexes, bidding activity for commercial real estate posted its strongest monthly improvement in a year. July also recorded the second-highest number of unique bidders in the index’s five-year history. Perhaps even more importantly, competition among lenders is now well above previous record highs.
That does not mean every property is suddenly receiving twelve offers, interest rates are headed back to 3%, or we should dust off our 2021 underwriting models. Those days are not returning anytime soon, and that may be a good thing.
But capital is clearly beginning to come off the sidelines.
Credit Usually Moves First
One of the more interesting findings in the JLL data is that credit activity appears to be a leading indicator for bidding activity. In plain English, lenders tend to return before buyers become aggressive.
More capital is now flowing from commercial mortgage-backed securities, insurance companies, government agencies and private debt funds. These groups still have money to deploy, and many are becoming more comfortable with commercial real estate after the massive wave of distress predicted over the last several years never fully materialized.
We certainly experienced problems. Office properties continue to face challenges. Multifamily is digesting a historic amount of new construction. Higher borrowing costs have created refinancing pressure across nearly every property type.
But the widespread collapse that some investors expected did not happen. As lenders become more confident, financing becomes more available. When financing becomes more available, more buyers can compete. When more buyers compete, pricing begins to firm up. That process appears to be underway.
The Recovery Is Not Evenly Distributed
Investors are not returning to every sector at the same pace. Industrial remains attractive because of e-commerce, manufacturing growth, shorter supply chains and corporate efforts to bring more operations closer to home. Retail has also become increasingly competitive, an interesting reversal for a property type that was supposedly headed toward extinction not that long ago.
It turns out that when very little new retail is built, existing properties remain occupied and tenants continue paying rent, investors become interested again. Who knew?
Multifamily, meanwhile, continues to work through a large pipeline of new supply. Office remains highly dependent on the individual property, tenant mix, location and cost basis. There are opportunities in both sectors, but buyers and lenders are underwriting them carefully.
That selectivity is important. This is not a market in which every boat rises together. Capital is returning, but it is returning first to properties with durable income, strong locations and a believable story.
Waiting Has a Cost
For the past few years, waiting felt like the safest strategy. Owners waited for interest rates to fall. Buyers waited for prices to decline. Lenders waited for greater clarity. Everyone waited for everyone else to make the first move.
But real estate markets rarely provide an official announcement that the bottom has passed. There is no bell, ribbon cutting or press conference. By the time everyone agrees that conditions have improved, the best opportunities may already have attracted multiple bidders.
I am not suggesting that investors should suddenly become reckless. The fundamentals still matter. Debt remains expensive, operating costs have increased and every assumption deserves to be tested.
However, there is a difference between being disciplined and being frozen.
The investors who are most successful during a transition are usually not the ones making heroic predictions. They are the ones studying the market, maintaining relationships with lenders and brokers, and preparing to act when the right property becomes available.
What This Means for Owners and Investors
For owners considering a sale, increasing bidder activity and improving credit availability are encouraging signs. A property that received limited attention twelve months ago may be viewed differently today, particularly if it has stable income and a strong operating history.
For buyers, improving liquidity is both good news and a warning. Financing may become more accessible, but attractive opportunities will likely draw more competition. The window in which buyers can demand both deeply discounted pricing and highly favorable terms may be narrowing.
The commercial real estate market is not fully recovered, and it is certainly not “frothy.” But the direction of travel appears to be changing. After several years of sitting at the starting line, more capital is entering the race. The question is no longer simply whether the market will thaw. It is whether you will be prepared when it does.
Justin Langlois, CCIM is a Commercial Real Estate Advisor with Stirling Investment Advisors serving Baton Rouge, Louisiana and the Gulf South. Please reach out to Justin to discuss your real estate investment strategies.