Is it the Best of Times or the Worst of Times?

Depends on who you are asking.

Two of the world’s largest property investors have differing views on the current state of the US commercial real estate market.

Blackstone, which manages around $600 billion in property globally, believes the market is stabilizing. They believe that a peak in interest rates and a slowdown in new construction suggest that US real estate is reaching a bottom.

In contrast, Starwood Capital Group, managing $115 billion, anticipates more challenges ahead. Barry Sternlicht, Starwood's chairman, predicts a significant distressed cycle, with banks at risk of failure due to higher interest rates causing the loans in their portfolios to become unmanageable. Starwood believes there is a huge distress wave about to hit us.

Are we shipwrecked and now it is going to get better or are we about to hit the rocks and sink?

Or can we potentially be bounced around for another year with higher than normal rates and slow pricing discovery.

Globally, real estate transactions have declined for seven consecutive quarters, reaching $130 billion in the first quarter of 2024, the lowest level since 2011-2012 following the global financial crisis, according to MSCI Real Assets. The decrease in dealmaking since central banks began raising interest rates in 2022 has added to uncertainty about property valuations.

In the US, prices have begun to stabilize, with values remaining unchanged from March to April, according to a Green Street index. However, overall asset values are down 21% from their peak in early 2022, led by a 37% drop in office property values.

At this point in the cycle office buildings are like nuclear waste, who wants them?

The expectation is that a significant portion of upcoming transactions will be driven by properties needing refinancing as loans mature in the current higher interest rate environment. The Mortgage Bankers Association estimates that a record $929 billion of commercial property debt, about 20% of outstanding loans, is maturing this year. Some will get kicked forward, some will get worked out and some will go back to the bank.

Starwood notes that real estate is building by building and there are always gems in the trashpile to be found.

In a tale of two opinions: ?Blackstone sees signs of stabilization in the US commercial real estate market, while Starwood Capital Group predicts further difficulties. The global decline in real estate transactions and the large amount of commercial property debt maturing this year add to the complexity of the market. Investors are advised to carefully consider their choices, particularly regarding location and timing, in this uncertain environment.

What do you believe?