While fears of a commercial property crisis peaked in early 2023, the worst-case scenarios failed to materialize. Key indicators are now showing a clear recovery, with transaction volumes, prices, and debt origination all rising. This suggests a disconnect between lingering negative sentiment and improving on-the-ground fundamentals.
The interest rate hikes of previous years caused a significant slowdown in new property construction. Because buildings take several years to complete, the market is only now feeling the impact of this reduced supply pipeline. This emerging scarcity of new properties is providing fundamental support for the value of existing buildings.
While strong demand has compressed risk premiums to historic lows across most fixed income markets, debt backed by commercial mortgages (CMBS) is a notable exception. CMBS spreads are significantly higher than their long-run average, presenting a rare value opportunity for credit investors in a market where yield is scarce.