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SEPTEMBER LIGHTBOX CRE ACTIVITY INDEX REFLECTS STRONG EARLY RESPONSE TO FIRST
INTEREST RATE CUT

October 7, 2024 7 mins

The expectation of the long-awaited first interest rate cut in more than four
years, coupled with growing investor impatience to deploy capital in the final
months of 2024, drove a strong month for the LightBox CRE Activity Index. This
aggregate measure of activity in commercial property listings, environmental due
diligence, and appraisals collectively tracks shifts in the velocity of key
functions that support CRE transactions.

The most significant development in September was the Federal Reserve’s decision
to lower interest rates for the first time since March 2020. While the rate cut
itself wasn’t a surprise, the 50-bps magnitude was, given that higher rate cuts
typically signal a market in distress. Not surprisingly, the CRE lending and
investment market responded favorably to the news, but the near-term forecast is
not without its storm clouds. Recent issues, such as the now paused strike at
East and Gulf ports—where a temporary agreement is in effect until January 15,
2025—the escalating conflict in the Middle East, the devastation caused by
Hurricane Helene, and the impending November elections, all pose risks that
could hinder positive momentum for CRE activity in October and throughout the
fourth quarter.


SEPTEMBER CRE ACTIVITY INDEX INCREASES MORE THAN 8 POINTS TO 98.2



After August’s Index of 89.9 ended a five-month streak of increases that took
root in March, September’s Index resumed a trajectory of increasing velocity,
coming in at 98.2, an increase of 8.3 points. The increase was fueled by an
uptick in commercial property listings, which typically happens after Labor Day
as the market settles into the final months of the year. The Fed’s
higher-than-expected interest rate cut sent a strong signal to the market that a
new cycle is underway with borrowing costs falling for the first time in more
than four years. Environmental due diligence and appraisal activity also
increased modestly over August in an early sign of the lending and investment
engines gaining steam heading into Q4. If more assets move into play and lenders
re-engage, the Index in the coming months will reflect the market’s growing
momentum as 2024 closes out.


MONTHLY LIGHTBOX CRE ACTIVITY INDEX (JANUARY 2021 – PRESENT)

NOTE: The gray horizontal line indicates the Q1 2021 monthly average. The
LightBox CRE Activity Index is based on changes in environmental due diligence
(measured by Phase I ESA volume), commercial property listings, and valuation
market activity indexed to a baseline (Q1 2021 monthly average =100) to give
market watchers a pre-slowdown basis of comparison. The index is normalized to
account for variations in the number of business days per month.



FIRST INTEREST RATE CUT OPENS THE DOOR TO A NEW CHAPTER FOR CRE



For much of this year, the market was essentially left to speculate about when
the Fed would vote to lower rates. This uncertainty left banks holding tight to
the reins on new loan originations, while private equity firms formed debt funds
to fill the vacuum in lending at a time when the market faces trillions of
dollars in impending maturities and the prospect of more loan defaults.

September’s biggest development was the Federal Reserve’s first interest rate
cut since 2020, which spurred a positive reaction from the CRE lending and
investment markets.

Manus Clancy
Head of Data Strategy
LightBox



“The 50-bps cut was an unexpected but welcome surprise for CRE, providing a
psychological boost. Even a 25-bps cut would have signaled to the market that a
new era of capital deployment has finally begun.”

With lower rates and an increase in transactions comes more clarity on property
pricing and an urgency to place capital before prices in some asset classes and
geographies increase. Any borrowers who originated floating rate loans at the
market high point of 2021 and early 2022 will see at least some moderate initial
relief from rates that are no longer climbing and adversely impacting their cash
flow and debt service coverage ratio (a measure of a property’s income
generation relative to debt obligation).

Declining rates will begin to lower costs for borrowers with maturing loans,
many of which from 2023 and 2024 were extended in the hope of refinancing in a
more favorable interest rate environment. Thus, the increasing momentum in CRE
activity since March (notwithstanding the small dip in the CRE Activity Index in
August) is likely to gain traction as the universe of buyers expands, debt
capital costs fall, and more properties begin to change hands either as
traditional or forced sales. 


PSYCHOLOGICAL IMPACT OF THE FIRST RATE CUT CLOUDED BY GROWING RISKS



The strength of the September CRE Activity Index, coupled with the likelihood of
more rate cuts at the November and December Fed meetings, lays the foundation
for stronger lending and transactions activity through year-end and into 2025.
The latest prediction from the Mortgage Bankers Association (MBA) is that total
commercial and multifamily mortgage borrowing and lending will end 2024 at $539
billion, a 26% increase above 2023. Given that Q2 lending increased only 3% year
over year, the MBA is anticipating a significant uptick in lending and refinance
activity now that rates are falling. While short-term borrowers could hold off
for future rate cuts, long-term investors are likely to move in quickly to take
advantage of a growing number of opportunities while liquidity is still
constrained. Despite a cautiously optimistic outlook for the Index in Q4, there
are a growing number of risks that deserve attention.

First is the threat of inflation. Lower interest rates translate into lower
borrowing costs, which could drive a rise in already-elevated housing prices.
Housing is an important component of the Consumer Price Index (CPI) so any
uptick in housing threatens to reverse the 24-month decline in CPI. For now, big
supply chain snags have been averted with the suspension of the strike by 45,000
U.S. dock workers on the East Coast and along the Gulf. But the 3-day strike was
a reminder of the pandemic supply chain problems that fanned the flames of
inflation in 2022. Although Fed Chair Jerome Powell expects the central bank to
lower rates by another half percentage point by the end of the year- somewhat
lower than markets had been anticipating, much depends on what the data shows in
coming weeks.

The September jobs report showed that the pace of hiring picked up strongly last
month and the unemployment rate ticked down, a sign of a resilient labor market.
The next round of jobs data, to be released November 1st, could reflect any
layoffs triggered by Hurricane Helene. Any evidence of inflation rearing its
ugly head, or a weakening of the labor market could complicate future rate cut
decisions.

Second, the upcoming election is just over a month away, and issues like
inflation, housing, and job creation will be top of mind. In early September,
consumer confidence plunged after August data showed news of a weakening job
market and rising costs of living. But the September jobs data was more
encouraging. If October’s labor market data shows a softening, it could erode
market confidence as the election nears.

Last, although the market has thus far been able to avoid the widespread
distress of past downturns, pressure is building. Colliers estimates that
distress is on the rise with newly troubled loans now running at a pace five
times pre-COVID levels.


THE RATE CUT IS JUST THE BEGINNING FOR CRE



Despite the market’s challenges and risks, the rate cut triggers the start of a
new growth cycle for CRE. The strength and duration of the next chapter remains
to be seen. As the market gets more clarity on the future path for interest
rates, sentiment will improve, the pool of investors filing non-disclosure
agreements will expand, and stronger transaction and lending velocity will
follow along with lower cap rates, higher property valuations, and net operating
income (NOI) growth. While challenges persist, the market is now seeing growing
hope and enthusiasm that has been largely absent for several years. These pivot
points in the CRE market cycle always deliver an interesting mix of risks and
opportunities.


ABOUT THE MONTHLY LIGHTBOX CRE INDEX



The LightBox Monthly CRE Activity Index is an aggregate that represents a
composite measure of movements across activity in appraisals, environmental due
diligence, and commercial property listings as a barometer of broad industry
shifts in response to changes in market conditions. To receive LightBox reports,
subscribe to Insights.


Due-Diligence Brokers & Investors Lending Commercial Real Estate
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