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The embattled commercial-real-estate market may finally have a few things going its way, according to recent data.
A Moody's analysis found declining transactions had bottomed, with year-on-year sale volumes positive for the first time in two years. In the second quarter, the four core real-estate sectors notched $64 billion in transactions — marking a 9% upside turnaround.
That's not to say all is bright. The credit-rating agency noted persistent weakness in the office space, as last quarter's vacancy rates hit another record high, at 20.1%. However, national office utilization has increased enough to stabilize the market.
Post-COVID norms have been the chief culprit behind office-sector strain, as remote work became an entrenched part of US corporate culture. With fewer employees using the office, buildings lost tenants. That left owners with harder-to-pay debt, made worse by high interest rates and tighter bank lending. Defaults have not been uncommon.
Yet lending volumes are slightly improving, Moody's said.
Second-quarter mortgage-origination volumes are up 3% year to year, an improvement that was led by commercial mortgage-backed securities. In the same quarter, they've jumped 155% on an annual basis.
Moody's expects bank lending to turn positive by the end of 2024. That may be welcome news for Wall Street, as fear has mounted of a distress wave looming over smaller dealers. As these lenders are most exposed to commercial real estate, some analysts have said that hundreds of banks risk failing in the next few years.
Now some see opportunity in the real-estate market.
Analysts at KKR agreed that sector conditions had bottomed but predicted that banks would become limited participants in the market moving forward. If these dealers reduce lending to 30% of the market, that would create a $300 billion gap, the firm said.
"We think this will be an attractive vintage for real estate credit," the analysts Matt Salem and Dakota Sagnelli wrote, later adding: "A growing number of commercial real estate transactions should increase the number of opportunities to lend, while the dearth of bank capital should keep yields attractive and spreads relative to corporate credit elevated."
For instance, KKR noted that spreads on B-level commercial mortgage-backed securities had widened 400 basis points since 2022.
For investors who are concerned about risk, the analysts said that valuations had reset. Meanwhile, the market owes 30% less money than it did in 2022's first quarter, when prices were near a peak.
"For lenders, this means a larger equity cushion and a smaller overall debt burden," the note said. "We are often lending at some 50% of peak valuations."
