The Psychology of the Real Estate Market

How many times does someone ask you, "How is the market?" Depending on your specialty within real estate, the answer varies slightly. I would argue that the overall sentiment is that the atmosphere is challenging, to say the least. Some might even go so far as to say the market is dead. While I vehemently disagree with that statement, there are certainly reasons why someone might be currently sitting on the sidelines.

Real estate values are driven by factors such as cap rates, rents, vacancy rates, and concessions, among others, but interest rates are where much of the focus lies. There are many articles and media reports on interest rates and predictions on when there might be a cut or two. This changes frequently, and there are more intelligent economists than I at predicting the likelihood of this occurrence. However, I do believe that this collective waiting for a rate cut is causing both buyers and sellers to remain on the sidelines.

Supply and Demand Dynamics

During the first half of 2024, New York City investment sales will show a slight uptick quarter over quarter for dollar volume, but when annualized at around $12 billion, it’s still only about one-third of the 10-year average.[1] Challenges in obtaining financing and the cost of it, as well as the vacancy rate for offices, are holding back many of the significant transactions that drive dollar volume.

Don’t forget that this is a market driven by supply and demand. Sellers are waiting to see if there is a rate cut so they can feel confident in selling into an upswing. Meanwhile, buyers want to purchase at the bottom of the market, ensuring they receive the absolute best price, and are undoubtedly waiting for a rate cut to signal that the market has turned a corner.

It should be noted that buyers who are waiting on the sidelines could be missing out because some sellers must transact. They may have a loan coming due, and there might still be equity in the deal where they can transact but don’t have the ability to cash in on a refi. Or they may be cooperating with the lender for a short sale and can sell into the market. With less competition, buyers should theoretically be able to get a better price. If they wait until there is a collective feeling that the market has bottomed out, there will be more competition.

The Herd Mentality

I also believe that the media plays into the psychology of investors—both buyers and sellers alike. For instance, headlines such as “Property Fraud Allegations Snowball as Commercial Real Estate Values Fall” cause many to hesitate on transacting.[2] Articles highlighting the tremendous amount of debt coming due and the rising levels of distress lead both sellers and buyers to wait longer. Buyers wait for more distressed properties to come through the pipeline from bank sellers or distressed owners who are facing mortgages that are due. Sellers will think that they don’t want to compete with that type of distressed product and will also wait if they are discretionary sellers.

On the flip side, when you hear reports like Blackstone acquiring AIR Communities for $10 billion, this signals to the marketplace that the tides might be changing.[3] They’ve also been public about the amount of dry powder and their willingness to come back into the market. Institutions, and especially acquisitions departments that might be fearful of bringing a deal such as an office opportunity to an investment committee, will be comforted with this news. With this herd mentality, others may follow suit and rejoin the marketplace.

Opportunities to Engage

There is, of course, no way to determine how many buyers are in the marketplace, and even sellers, for the most part, are difficult to number. It’s hard to tell how much product is on the market. We can observe that right now there are 260 listings of $5 million-plus in Manhattan on LoopNet, which does not come close to representing all the inventory. However, it does give a sense of what’s available. Brokers can see this based on the number of confidentiality agreements signed for our listings, which has no doubt decreased since before mid-2022 when rates started to increase.

I think we can agree that right now the sales market has been muted, and I believe with a rate cut, buyers and sellers will decide to engage and become eager to get back into the marketplace.

What could this do for pricing? It could be an accelerator. If more buyers engage in the marketplace, it will drive up pricing, and sellers will be happy to receive this type of increased activity. Still, being a contrarian investor means not following the headlines. As Bill Clinton said, “Follow the trend lines, not the headlines.” If you stick with that, there are opportunities to be had.

In New York, we’re seeing incredible rental growth in residential rents, a drop in sublet space for offices, a resurgence of retail, and increased developer interest as new tax incentives have been announced. Let’s hope that soon, when asked about the market, we can say that we have turned the corner and are on our way back.

[1]https://www.avisonyoung.us/

[2] https://www.wsj.com/real-estate/property-fraud-allegations-snowball-as-commercial-real-estate-values-fall-492d964c

[3] https://www.blackstone.com/news/press/blackstone-real-estate-completes-privatization-of-air-communities-for-approximately-10-billion/