CRE finance market prepares for recovery as sentiment soars to highest level since 2017
The commercial real estate finance (CRE) sector is showing signs of renewed confidence, according to the latest survey from the CRE Finance Council (CREFC).
The Board of Governors (BOG) Sentiment Index, which tracks sentiment in the sector, rose to 121.1 in the third quarter of 2024. That marks an 18% increase from the previous quarter and the highest reading since the index was launched in 2017.
CREFC executive director Lisa Pendergast attributed the positive shift to lower interest rates and an improving economic outlook.
"The latest survey results signal a strong resurgence of confidence within the CRE finance industry,” Pendergast said. “Expectations of further Federal Reserve easing, combined with increased investor and borrower demand, suggest market participants are preparing for growth and opportunity through year-end and into 2025. While challenges remain — particularly in the office sector — the overall outlook is more optimistic than in previous quarters."
Survey respondents expressed hope that the recent Fed rate cuts could boost commercial real estate transactions, which had been dampened by a period of elevated rates.
"Expectations of easier US central bank monetary policy have improved sentiment in the commercial real estate finance market and any additional interest rate cuts by the Federal Reserve likely will support transaction volume. The lower borrowing costs are welcome after a protracted period of elevated interest rates," Leland Bunch, chair-elect of CREFC and managing director at Bank of America, said in the report.
However, while the overall outlook has improved, challenges remain in certain areas, particularly the office sector. Around 62% of respondents expect values for older, less amenitized office buildings to continue declining. This sector has been hit hard by the shift toward remote work, with many companies downsizing or rethinking their office space needs.
The survey also highlighted concerns about liquidity in the debt capital markets, although confidence in this area has improved significantly. A majority of respondents now expect market conditions to become more favorable, pointing to increased demand for both commercial mortgage-backed securities (CMBS) and collateralized loan obligations (CLOs).
Read more: Distressed office, retail loans drive CMBS delinquencies higher – KBRA
While office properties remain a sore spot, the broader commercial real estate market appears poised for a recovery. Investor demand for CRE assets is expected to rise, and borrower demand for loans is also increasing as borrowing costs decrease. Most respondents believe that transaction volumes will pick up meaningfully in 2025, as interest rates stabilize and the market adjusts to new conditions.
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