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Investors are flooding into the commercial real estate market, driven by a surge in liquidity from across the financial sector. This is despite borrowing interest rates remaining high.
Real estate bidding in June recorded the biggest monthly improvement in a year, according to JLL’s quarterly bid and credit index released on Tuesday. July also saw the second highest number of unique bidders in the index’s five-year history. Competition among lenders is also well above all-time highs, according to JLL.
“An interesting finding with the latest data for this index is that the divergence between the credit strength index and the bid strength index has narrowed,” said Lauro Ferroni, head of Americas capital markets research at JLL. “We actually found that the creditworthiness index is a leading indicator of the bid strength index, because the presence or absence of creditworthiness determines the liquidity trend.”
Bidding continues to rise despite continued macro uncertainty and volatility across the economy. Ferroni said this is because the weight of active capital in the market could offset and act as a more powerful force than the ongoing volatility.
Credit now flows more freely from commercial mortgage-backed securities, insurance companies, government agencies, and bond funds. That was not the case in the first few years after the pandemic, thanks to the woes of some CRE sectors and rising interest rates starting in 2022.
“Because they like real estate. They want to grow their real estate book. In some cases, they can generate more yield there,” Ferroni said. “They’ve seen how the sector develops. There hasn’t been a big wave of crises or defaults. That’s why they’re coming back to this sector.”
Specifically, investors are flooding into the retail and industrial sectors. Retail is a newer phenomenon, as it has been one of the worst-performing sectors due to the growth of e-commerce during the pandemic. According to JLL, competition in the retail industry is increasing as owners are not interested in selling in favor of the profits they can make.
The industrial industry has already been doing well in recent years, thanks to the explosion of e-commerce as well as recent reshoring and reindustrialization. According to CBRE’s mid-year report, companies are moving or expanding manufacturing operations closer to the U.S. to shorten lead times, reduce supply chain risks and, in some cases, reduce tariff burdens. According to the report, manufacturing leases increased by 27% year-on-year.
The weakest sector in bidding and credit activity continues to be the multifamily sector. The sector continues to supply historic new construction. Vacancy rates are finally on the decline nationwide, largely due to new properties. Stable vacancy, which excludes properties still under lease, rose 34 basis points in the second quarter of this year, according to Coster.
Ferroni said he doesn’t see any major red flags for competition across CRE. The U.S. Treasury’s move last week to buy long-term bonds could help companies currently underwriting real estate deals. It also increases confidence that investors can be more competitive in their bids.
“There’s quite a bit of gas left in the tank for further growth, and we think it’s going to be gradual rather than explosive,” Ferroni said. It doesn’t seem to foam at all.
Correction: This article has been corrected to reflect that real estate bidding in June marked the first monthly improvement in a year, according to JLL. Previous versions incorrectly listed the time period.
