Cambridge Associates says that the US Commercial Real Estate market faces challenges but opportunities exist. 

Senior Investment Director in the Real Assets Group, Maria Surina, and Investment Director in the Capital Markets Research group, Sehr Dsani, forecast that the much-anticipated recession will put further strain on commercial real estate across asset types, but that much of that downward pressure will be cyclical and limited to the near-term. In the medium term, secular tailwinds are expected to continue to drive yield in sectors like industrial and multifamily residential, as well as some niche product types. 

On the other hand, in addition to the cyclical strains, office product is experiencing secular change. Overall, public REIT performance suggests valuations on privately held office assets could fall around 30 to 40% percent. 

But there is bifurcation within the sector, where class-A product is experiencing modest depreciation and older buildings or those in oversupplied markets are seeing especially large valuation resets. 

Surina and Dsani state that transaction volume across all privately held real estate has slowed, which has historically been a leading indicator of valuation declines. Transaction volumes contracted by more than 35% in 2022, and year-over-year first quarter 2023 decreased 62%.

But along with the strain, Cambridge Associates concludes that opportunity awaits and they point out a record amount of CRE loan origination took place over the past three years in the low interest rate environment and a record number of commercial real estate loans are maturing over the next two. Meanwhile, there has been record fundraising and reduced trading resulting in an estimated $280 Billion waiting for deployment – ready to scoop up distressed assets and ride into the next phase of the cycle. 

And those investors are likely to be rewarded: since 1975, REITS have outperformed the broader US equity market 80% of the time during market recovery phases.