US Commercial Real Estate Down 26%: Is the Bottom Near?
In real (CPI adjusted terms) US Commercial Real Estate prices are down -26% off the peak, and have been declining for a period of 3.5 years so far.
The chart below compares and contrasts the past two major downturns in commercial real estate: the late-80’s/early-90’s was much more drawn out and also deeper than the current downturn, while the 2008 crash saw a much more rapid adjustment process and a steeper drop in prices.
It’s hard to say how much further the current downturn will run, but so far it has been a material move in both price and time — the cycle is well-progressed.
The risks from here would include: higher for longer interest rates further pressuring profitability and removing yield-chasing tailwinds, potentially alongside ongoing work-from-home and maybe even AI impacts on occupancy… along with the ebb and flow of the economic cycle (as it influences funding availability, risk appetite, and rental pricing and occupancy).
The upside would be: we’ve already seen a major adjustment in valuations, investment in new supply (construction) has been limited, and a resilient economy and labor market + hybrid/back-to-work trends have seen some work-from-home effects offset. Meanwhile this time around leverage and lending standards in the lead-up to this correction were much tighter than previous cycles (making the market somewhat less vulnerable to credit stress vs previous cycles).
So again, for a market that many commentators have been cautious on, maybe the contrarian take is that the downturn in commercial real estate is closer to turning the corner than we think. That would help REITs, and probably come as a surprise to most.
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