CSGP Shares Have Finally Rolled Over. The CRE Market Is Only Beginning To Roll Over.
CSGP was an easy sell call as bookings began to decline year-over-year in the June 2023 quarter. The bookings decline accelerated in the September, December and recent March quarters (March bookings were down 41% y-o-y on an organic basis). There is more downside risk in the world of CRE - especially within the Office segment.
See our recent CSGP notes below:
The CRE office segment is approximately a $3 Trillion segment. Are all of the office buildings that comprise this segment at risk of becoming a distressed property? No. However, as the Office sector begins to roll over, investors will panic, shoot first and ask questions later.
Which office properties are at risk of becoming distressed if they aren’t so already? Just have a look around U.S. cities. Tenants want new buildings. Older buildings may be running at 50% utilization or lower. Once rent rolls fall, the value of that property falls and banks want more cash on hand for that property, which may force a sale at a distressed valuation.
Here is the issue with older office buildings: if the Fed takes its Fed Funds Rate down, the lower rate isn’t going to make tenants want to lease older buildings. Occupancy won’t magically go from 50% to 80%. Vacancy rates will remain high for these older properties regardless of rates.
Which CRE lenders are in trouble? To answer that, it is important to know which CRE lenders have loans outstanding on older office buildings with low occupancy. That data is not readily available, although interestingly, CSGP (CoStar’s property professional information service), is the best resource for researching that data. Perhaps investors ought to sell CSGP shares but subscribe to CSGP’s CRE data service.