It Should Be ‘Do More in ‘24’ Rather Than ‘Survive Till ‘25’


For those managing a commercial real estate portfolio right now, it can be tempting to sit and wait out the uncertainty: How fast will the Fed cut rates? Will the economy grow rapidly again? Where is the floor on values of troubled assets as maturities loom?  

No one can time the economy perfectly, but industry veterans have been around the block enough times to know that recovery will ultimately come. In past difficult periods, those who identify early signs of success or trouble, and take action, have often been rewarded. Winners in the second half of this decade will be investors and lenders who use sluggish periods wisely, from finding prudent spots to invest to sharpening underwriting pencils to optimizing processes with new data or AI. 

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There have been few times when CRE sentiment felt more dire: U.S. office physical attendance rates plateaued in 2023 at around 50 percent of pre-pandemic averages. Last year had the lowest CMBS office loan payoff rate ever recorded, even lower than in the aftermath of the Global Financial Crisis. But, if CRE insiders allowed national headlines to be the only source of truth, deals would be a thing of the past.  

Luis Amador
Luis Amador. Photo: Moody's Analytics

There has been an urban doom loop previously, but not right now. U.S. cities aren’t ghost towns or even flashing signals of a traditional CRE downturn. Property and credit fundamentals are vastly better today than they were after the GFC or dot-com bubble of the late 1990s and early 2000s. Metros such as Knoxville, Tenn., Columbia, S.C., and Charleston, S.C., buck the trend with strong positive office rent growth. And other asset classes have enjoyed steady growth nationwide.  

After six consecutive down quarters, transaction volume seems to be loosening up, and the Mortgage Bankers Association expects 29 percent lending volume growth in 2024. Thanks to expectation-
defying GDP results and a strong labor market, a soft landing is very much on the table. 

Painting the CRE industry in broad strokes won’t be the answer to identifying opportunities or risks as business picks back up. For example, New York’s multifamily effective rent fell by 0.8 percent quarterly in the fourth quarter of last year, but the Stuyvesant submarket grew by nearly 3 percent. 

According to CBRE, 80 percent of total occupancy loss between 2020 and 2022 came from the “hardest-hit buildings” — a class that makes up only 10 percent of total office buildings. Judging a part by the success of the whole doesn’t make sense: Neighborhood specifics like crime rates, school ratings, child care, public transportation accessibility, foot traffic, and amenities like gyms, restaurants and shopping can reinforce a CRE asset’s viability and value. Blanket assertions do not cover community variations. 

San Francisco is a great example of hyperlocal dynamics — it truly is a market of markets. Despite the headlines, there’s a lot more to the city’s future than just shuttered storefronts and an office wasteland. While San Francisco posted the worst office performance in the fourth quarter last year, it ranked third for warehouse and distribution rent growth in the same quarter. The San Francisco of tomorrow could be brought about by office-to-
apartment conversions to ease the housing crisis. According to Moody’s CRE data, 13 percent of San Francisco offices are viable candidates for such an outcome. As the nascent yet meteoric growth of GenAI takes off, converting offices into data centers is another possible route for the San Francisco skyline. 

Assets are evolving in parallel to shifting mindsets. Moody’s economists predict mixed-use properties to be CRE’s future, reflecting a behavioral preference toward centralized living, walkability, and ease of access for residents. These communities weave seamlessly into the lifestyles of residents so they can exit their apartment, stop at the gym, use a coworking space, grab coffee, get groceries, and go to dinner after work without ever hopping in a car. Communities emulating this model have been popping up, like The Domain in Austin. This trend will only proliferate more over the coming years. 

Whether you feel optimistic about the rest of the year or are sitting back until 2025 (or later), one thing is certain: Uncertainty unearths opportunity. It’s time to look ahead and prepare, whether that’s for this year, next year, or beyond.  

Luis Amador is general manager of Moody’s Analytics CRE.