Commercial Real Estate Activity Remained Stable as Investor Perspectives Aligned
The Federal Reserve Bank of Kansas City released its KC Fed CRE Index today. The value of the index decreased slightly from -0.6 to -0.75 coming into the fourth quarter of 2024. The decline in CRE activity was driven almost entirely by a drop in loan demand that occurred prior to the recent changes in the stance of monetary policy and movements in longer-term rates. Other indicators of CRE activity remained stable generally, and perceptions of prevailing conditions among market participants became much more similar heading into the end of the year.
“Commercial real estate conditions and levels of activity remained stable through the end of the summer and into fall,” according to Nicholas Sly, vice president at the Federal Reserve Bank of Kansas City. “However, loan demand for commercial real estate deals faced headwinds from uncertainty and volatility in longer-term interest rates. Even amid the uncertainty about rates, market participants’ views on conditions fell strongly into alignment as their perceptions about financial risks and demand conditions coalesced.”
Chart 1: The KC Fed CRE Index remained stable, even as CRE loan demand fell
Note: An index value of zero corresponds to overall conditions being at their historical average and differences from zero are measured in terms of standard deviations from the historical norm.
Table 1: Drivers of change in the current KC Fed CRE Index
Notes: Contributions may not add to total change in index due to rounding. The contribution of each metric is calculated as the change in the standardized value of the variable from the previous quarter multiplied by the coefficient of the variable in the index.
Chart 2: Market participants’ views on CRE conditions fell strongly into alignment during the last quarter, raising the signal quality of the index for overall CRE activity.
Note: Values correspond to measures of Shannon entropy, with higher numerical values indicating more mixed responses and lower signal quality of the KC Fed CRE Index.