Finance  ·  Analysis

CRE Values Expected To Fall 10 percent Further: PGIM Report

National office is only halfway through a peak-to-trough decline of approximately 43 percent, per report


If you think the commercial real estate market has reached bottom, think again. 

A new report from PGIM Real Estate, has concluded that industry-wide asset values fell 8 percent through the first three quarters of 2023 and can be expected to decline by a further 10 percent in the coming quarters. Most concerning: national office is only halfway through a peak-to-trough decline of approximately 43 percent, decisively larger than the 34 percent decline in value the sector experienced during the Global Financial Crisis 15 years ago. 

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Moreover, the expectation that interest rates will remain “higher for longer” will contribute to persistent gaps in the bid-ask spread between sellers and buyers, according to PGIM. 

“The main takeaway is we think values have about 10 percent more to fall,” said Lee Menifee, Head of Americas Investment Research at PGIM Real Estate, and the author of the report. “That’s less than in the Global Financial Crisis downturn, not as big as a downturn as you had from that, but the second big takeaway is how different the value falls are by sectors relative to the GFC.” 

PGIM has forecasted peak-to-trough value declines of 13 percent for retail, 17 percent for industrial, and 23 percent for multifamily in this current cycle. Smaller sectors like senior housing and manufactured housing are expected to decline by 14 percent and 16 percent, respectively. 

However, one paradox that emerged in the PGIM data is how well property incomes have held up even as property values have declined during the dislocation.  

“We’re having higher interest rates that are clearly causing values to fall, but at the same time, we have property incomes that are holding up pretty well and in many cases growing,” explained Menifiee. “That’s a really unfamiliar environment for real estate investors to have those two things happening at the same time.” 

Menifee emphasized that the impact of higher interest rates is the dominant force in commercial real estate right now and that the repricing of income streams has created a frozen transaction landscape where owners would prefer to hold and most buyers would prefer to wait for even lower prices.  

“The increase in interest rates threw the market back into reverse,” said Menifee. “We haven’t seen any thawing there. [Owners] see that valuations are coming down, but they aren’t willing to [accept] below where they expect those valuations are likely to land.”  

It’s not all bad news. PGIM forecasts positive revenue across all major commercial real estate sectors over the next four years. Moreover, Menifee is bullish on investment opportunities across the public real estate investment trust [REIT] space. 

“Surprisingly, where capital has not gone, that we expected to see, is into public real estate in the REIT market,” he said.  “Our anticipation is to see an increase of capital flows into the REIT market.”

The second area that PGIM is bullish about is in the credit space. Menifee believes there will be less capital available in lending in 2024; and while that’s not good for the overall CRE industry, it’s music to lenders’ ears. 

“For those that are able to allocate capital to the debt sector, that provides them with really fantastic risk adjusted returns,” said Menifee. “There’s that lack of competition, and that is true on the core lending side … but really where the financing gap is in non-core debt, things like mezzanine lending, preferred equity, other sources of capital in the capital stack. 

“That is, in our view, both scarce and very attractively priced,” he added.  

Brian Pascus can be reached at